CA Foundation · Business Economics · International Trade
Adam Smith's theory of international trade is based on the idea that a country should export a good when it:
Under Adam Smith's absolute advantage theory, a country should export a good that it can produce using fewer resources, that is at lower absolute cost, than other countries. Lower opportunity cost describes Ricardo's comparative advantage, which is a different test and not the one Smith used.
- ACan produce it with fewer resources than any other country in absolute termsCorrect
- BCan produce it at a lower opportunity cost than its trading partner
- CHas a larger population than its trading partner
- DHas a higher tariff on its import
Explanation
The absolute advantage theory of Adam Smith says a country gains by specialising in goods it can produce with lower absolute cost, that is, using fewer resources per unit than other countries. Lower opportunity cost is the test of comparative advantage given by Ricardo, so option 2 is wrong.
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