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CA Foundation · Business Economics · International Trade

Adam Smith's theory of absolute advantage says that a country should export a good when:

Under Adam Smith's absolute advantage theory, a country should export a good that it can produce with fewer resources per unit than another country. Lower input cost per unit gives it an edge, and specialising in such goods raises total output and gains from trade.

  1. AIt can produce the good with fewer resources per unit than another countryCorrect
  2. BIt can produce the good at a higher opportunity cost than other countries
  3. CIt has a lower tariff on the good than its trading partner
  4. DIt has a large domestic market for the good

Explanation

Absolute advantage means a country can produce a good using fewer resources (or at lower real cost per unit) than another country. Such a country gains by specialising in and exporting that good. A higher opportunity cost indicates a disadvantage, so option 2 is wrong.

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