The theory of comparative advantage exists because:

• A. individuals or countries have different opportunity costs for producing goods
• B. trade always leads to equal distribution of resources
• C. all producers have identical production capabilities
• D. absolute advantage determines all trade patterns

Answer: (A)

Verified step by step guidance

1. Understand the concept of comparative advantage: it explains how individuals or countries can benefit from trade by specializing in producing goods for which they have the lowest opportunity cost.
2. Recall that opportunity cost is the value of the next best alternative foregone when making a choice, which varies between producers due to differences in resources, technology, or skills.
3. Recognize that comparative advantage does not require identical production capabilities or absolute advantage; rather, it focuses on relative efficiency in producing goods.
4. Analyze why trade based on comparative advantage leads to mutual benefits, as each party specializes in goods with lower opportunity costs and trades for others.
5. Conclude that the theory exists because individuals or countries have different opportunity costs for producing goods, which drives the gains from trade.