Which concept explains why nations gain from trade by producing goods for which they have a relative efficiency advantage?

• A. Absolute advantage
• B. Comparative advantage
• C. Mercantilism
• D. Autarky

Answer: (B)

Comparative advantage explains why nations gain from trade: each country should specialize in producing goods for which its relative efficiency is highest, meaning its opportunity cost is lowest compared with other countries. This focus on relative costs, not just how much is produced overall, is why trade can be beneficial even if one country is more productive in every good. By concentrating on the goods with the lowest opportunity costs and then exchanging, both countries can increase total output beyond what they could manage alone. For example, if one country is relatively better at wine and the other is relatively better at cloth, both should specialize accordingly and trade to enjoy more of both goods.

If we talk about absolute advantage, the emphasis is on who is more productive overall, which doesn’t always determine who benefits from trade. Mercantilism centers on accumulating wealth via trade surpluses and protections, while autarky means no trade at all.