I'm very sure A is correct but if B is potentially a correct answer then it will need to change to D. Please clarify Which of the following statements is true? To realise the gains from trade,...

I'm very sure A is correct but if B is potentially a correct answer then it will need to change to D. Please clarify

Which of the following statements is true?

To realise the gains from trade, countries should specialize in producing goods in which they have comparative advantage

A country can have a comparative advantage in producing all goods.

Countries should produce goods in which their comparative advantage is greater than their absolute advantage

a and b are true

There are no gains from trade if one country has the absolute advantage in producing all goods.

Asked on by xyzmax1

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gsenviro | College Teacher | (Level 1) Educator Emeritus

Posted on

Absolute advantage relates to productivity and comparative advantage relates to opportunity cost. While the former is a nation's capability to build good more efficiently than others, the latter is a measure of nation's capability to produce a good at a lower opportunity cost than other nations.

Developed in 1817, Ricardo's classical theory of comparative advantage can be used here. Internationally, the comparative advantage rather than absolute advantage governs the trade. Hence A is true.

Statement B may also be true, but the chances of a country having comparative advantages in producing all goods are very slim. Yes, the underdeveloped countries may have extremely cheap labor, but they may lack the know-how. An example is the case of Space science or the knowledge to send satellite to earth orbits. 

Therefore, I would go with option A.

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