Free trade is based on which economic principle?

• A. Market equilibrium
• B. Absolute advantage
• C. Law of diminishing returns
• D. Comparative advantage

Answer: (D)

Verified step by step guidance

1. Understand the concept of free trade: Free trade refers to the international exchange of goods and services without restrictive tariffs, quotas, or other barriers.
2. Recall the economic principles related to trade: These include market equilibrium, absolute advantage, law of diminishing returns, and comparative advantage.
3. Define absolute advantage: It occurs when a country can produce a good more efficiently (using fewer resources) than another country.
4. Define comparative advantage: It occurs when a country can produce a good at a lower opportunity cost compared to another country, even if it does not have an absolute advantage.
5. Recognize that free trade is based on comparative advantage because it encourages countries to specialize in producing goods for which they have the lowest opportunity cost, leading to increased overall efficiency and mutual gains from trade.