Which of the following statements is true about the economic basis of trade according to the concept of comparative advantage?

• A. Trade allows countries to consume beyond their production possibilities frontier by specializing in goods for which they have a comparative advantage.
• B. Countries should avoid trade if their opportunity costs are identical.
• C. Trade is only beneficial if one country has an absolute advantage in all goods.
• D. Trade always results in equal gains for all participating countries.

Answer: (A)

Verified step by step guidance

1. Understand the concept of comparative advantage: it means that a country should specialize in producing goods for which it has the lowest opportunity cost compared to other countries.
2. Recall that the economic basis of trade is that by specializing according to comparative advantage, countries can trade and consume combinations of goods beyond their individual production possibilities frontiers (PPFs).
3. Evaluate each statement by comparing it to the principle of comparative advantage: the correct statement should reflect that trade allows consumption beyond the PPF through specialization.
4. Recognize that identical opportunity costs mean no comparative advantage exists, so trade would not be beneficial in that case.
5. Note that absolute advantage is not necessary for beneficial trade, and gains from trade are not always equal among countries; they depend on opportunity costs and terms of trade.