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CSS Micro Macro Economics P-I QUESTION #1688
Question 1
The doctrine of comparative advantage predicts that mutual gains from international trade arise when:
  • Both absolute and comparative advantage are present in both trading countries simultaneously
  • Opportunity costs for the same good are identical across all trading partners
  • Significant economies of scale exist in both trading economies
  • Each country specialises in producing goods in which its relative opportunity cost is lowest✔️
Correct Answer Explanation
David Ricardo's Law of Comparative Advantage (1817) states that a country should specialise in and export the good in which it has the lowest opportunity cost (relative efficiency), even if it is absolutely less efficient at producing all goods. The key is relative (comparative) not absolute efficiency. Gains from trade arise from differences in opportunity costs — not from their equality.