CA Foundation · Business Economics · International Trade
According to the theory of comparative advantage, a country should specialise in producing and exporting the good in which it has:
A country should specialise in the good with the lowest opportunity cost relative to other countries. Comparative advantage depends on what is given up to produce a good, not on absolute cost, so even a country with no absolute advantage can gain from trade.
- Athe lowest absolute cost of production compared with other countries
- Bthe lowest opportunity cost of production compared with other countriesCorrect
- Cthe largest domestic market for the good
- Dthe highest level of capital investment in the industry
Explanation
Ricardo's comparative advantage rests on opportunity cost: a country gains by specialising in the good it can produce at lower opportunity cost, even if it has no absolute advantage. Absolute cost advantage is the earlier Adam Smith idea and is not the criterion here.
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