Skip to content

CA Foundation · Business Economics · International Trade

According to the theory of comparative advantage, two countries can gain from trade when they differ in which of the following?

The correct answer is the opportunity cost of producing goods. Comparative advantage says countries gain from trade when their opportunity costs differ, because each can specialise in the good it gives up least to produce and then exchange it, raising total output and consumption.

  1. ASize of population
  2. BOpportunity cost of producing goodsCorrect
  3. CLevel of foreign exchange reserves
  4. DRate of income tax

Explanation

Comparative advantage rests on differences in opportunity costs. If the opportunity costs of producing goods differ between countries, each can specialise in the good with the lower opportunity cost and trade to gain. Population size, reserves or tax rates do not determine the basis for trade in this theory.

Did you get it right without looking?

One question tells you little. A timed set on International Trade shows your real accuracy, how long you take and where you lose marks.

Practise International TradeFree diagnostic mock

More International Trade questions