In macroeconomic trade theory, what does the Ricardian principle of comparative advantage prove?
Answer and explanation
Correct answer: A. Countries gain from trade by specializing in goods they can produce at lower opportunity cost
- Step 1: David Ricardo's comparative advantage model demonstrates that even if one nation has an absolute advantage in producing everything, both nations gain from mutual trade by specializing where their opportunity cost is lowest. Answer: Countries gain from trade by specializing in goods they can produce at lower opportunity cost. Why not the others: Absolute advantage is not required for trade, self-sufficiency (autarky) lowers living standards, and trade expands overall economic output.
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