Which of the following statements is true about specialization and trade according to the principle of comparative advantage?

• A. Specialization and trade always result in equal gains for all trading partners.
• B. Trade is only beneficial if both countries have identical opportunity costs.
• C. A country should specialize in producing goods for which it has an absolute advantage.
• D. Specialization and trade allow countries to consume beyond their production possibilities frontier.

Answer: (D)

Verified step by step guidance

1. Understand the principle of comparative advantage, which states that countries should specialize in producing goods for which they have the lowest opportunity cost, not necessarily an absolute advantage.
2. Recognize that specialization and trade enable countries to consume combinations of goods beyond their individual production possibilities frontiers (PPFs), meaning they can achieve higher overall consumption than without trade.
3. Evaluate the given statements by comparing them to the principle: gains from trade are not always equal, trade is beneficial when opportunity costs differ (not identical), and absolute advantage is not the key criterion for specialization.
4. Identify that the true statement aligns with the idea that specialization and trade allow countries to consume beyond their PPFs, reflecting increased efficiency and mutual gains.
5. Conclude that the correct understanding of comparative advantage highlights how trade expands consumption possibilities, rather than requiring equal gains or identical opportunity costs.