Question

State what the theory of comparative advantage forecasts: When there are two countries A
and B, and two goods are produced by them: good X and Y.
a) Trade between A and B will only take place if both countries are at a comparatively
similar stage in the development of their economies.
b) Trade can take place even if country A has an absolute advantage in both providing
that B chooses to specialize in the good in which it has the least comparative
disadvantage, and A specializes in the one in which it has the greater comparative
advantage.
c) Trade can only take place if country A has an absolute advantage in producing one
of the goods, and country B has an absolute advantage in producing the other.
d) None of the above.

Answer 1

option a is correct because option A is good answer

Answer 2

Answer:

Therefore, option (a) is correct .

Explanation:

What is comparative advantage?

The ability of an economy to produce a specific good or service at a lower opportunity cost than its trading counterparts is known as comparative advantage. Comparative advantage is a theory that explains why businesses, nations, or people might gain from trade.

Comparative advantage, as it relates to international trade, refers to the goods that a nation can produce more easily or at a lower cost than other nations. Even though this typically shows the advantages of trade, some modern economists now recognize that relying solely on comparative advantages can lead to resource exploitation and depletion in a nation.

What is theory of comparative advantage forecasts?

David Ricardo initially introduced comparative advantage in his 1817 work "On the Principles of Political Economy and Taxation." He gave the case of Portugal and England. Ricardo pointed out that Portugal needed less labour than England to manufacture both wine and fabric. However, fabric production in England was comparatively superior. So it made sense for England to import wine from Portugal and export textile to Portugal.

Comparative advantage example

1. Consider the UK and India as two nations.
2. Both of them manufacture books and textiles.

So, that net economic welfare can rise as a result of trade. But that doesn't necessarily guarantee that everyone will get along better. Some employees in uncompetitive industries may suffer and find it difficult to find work in new sectors.

Hence, option (a) Trade between A and B will only take place if both countries are at a comparatively similar stage in the development of their economies is correct.

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