Which of the following statements is correct regarding absolute and comparative advantage?

• A. If a country has an absolute advantage in both goods, it cannot benefit from trade.
• B. A country can have an absolute advantage in producing both goods, but still have a comparative advantage in only one good.
• C. Absolute advantage is determined by opportunity cost, while comparative advantage is determined by productivity.
• D. Comparative advantage refers to producing a good using fewer resources than another country.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definitions of absolute and comparative advantage. Absolute advantage occurs when a country can produce more of a good with the same resources than another country. Comparative advantage occurs when a country can produce a good at a lower opportunity cost than another country.
2. Step 2: Analyze the statement 'If a country has an absolute advantage in both goods, it cannot benefit from trade.' Consider whether having an absolute advantage in both goods prevents gains from trade based on comparative advantage theory.
3. Step 3: Evaluate the statement 'A country can have an absolute advantage in producing both goods, but still have a comparative advantage in only one good.' Think about how opportunity costs determine comparative advantage even if absolute advantage exists in both goods.
4. Step 4: Review the statement 'Absolute advantage is determined by opportunity cost, while comparative advantage is determined by productivity.' Recall which concept is linked to productivity and which to opportunity cost.
5. Step 5: Examine the statement 'Comparative advantage refers to producing a good using fewer resources than another country.' Compare this to the correct definition of comparative advantage, which is based on opportunity cost rather than resource use alone.