The principle of comparative advantage states that
A)countries with a comparative advantage in one good should specialize and trade but those with a comparative advantage in all goods should not.
B)the combined output of two producers will be enhanced if each specializes in the product in which it has a comparative advantage.
C)the combined output of two producers will be enhanced if each specializes in the product in which it has an absolute advantage.
D)countries with an absolute advantage in one good should specialize in that good whether or not they have a comparative advantage in that good.

Question

Quizplus · Accepted Answer

The principle of comparative advantage states that countries should specialize in producing the goods in which they have a comparative advantage and trade with other countries for goods in which they have a comparative disadvantage. This specialization leads to increased efficiency and higher total output for both countries involved. The principle does not concern itself with absolute advantage, but instead focuses on comparative advantage. Choice A is incorrect because it implies that specialization and trade should only occur in certain circumstances, which is not supported by the principle. Choice C is incorrect because the principle concerns itself only with comparative advantage, not absolute advantage. Choice D is incorrect because it assumes that countries should specialize in a good simply because they have an absolute advantage, regardless of whether it is their most efficient use of resources.

The Principle of Comparative Advantage States That