Which statement best describes the relationship between production costs and comparative advantage?

• A. Comparative advantage is determined solely by which country has the lowest absolute production cost.
• B. A country has a comparative advantage in producing a good if it can produce that good using fewer resources than other countries.
• C. Production costs do not affect comparative advantage; only technology matters.
• D. A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than other countries.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of comparative advantage. Comparative advantage occurs when a country can produce a good at a lower opportunity cost compared to other countries, not necessarily at the lowest absolute cost.
2. Step 2: Recognize that production costs include both explicit costs (like labor and materials) and implicit costs (opportunity costs). Comparative advantage focuses on opportunity costs rather than just absolute production costs.
3. Step 3: Compare the opportunity costs of producing goods between countries. The country with the lower opportunity cost for producing a particular good has the comparative advantage in that good.
4. Step 4: Note that absolute production cost (the total resources used) is different from opportunity cost. A country might have a higher absolute cost but still have a comparative advantage if its opportunity cost is lower.
5. Step 5: Conclude that the correct statement is the one emphasizing lower opportunity cost as the basis for comparative advantage, which aligns with the fundamental principle of international trade and specialization.