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Q13 (CAPF/2025) Economy › External Sector & Trade › Global trade patterns Answer Verified

The comparative advantage theory (CAT) is a trade theory that describes the basis of two nations engaging in trade. Which one among the following statements regarding the theory is not correct?

Result
Your answer: —  Â·  Correct: C
Explanation

The Comparative Advantage Theory (CAT) was authored by David Ricardo [2] and detailed in his 1817 work, 'On the Principles of Political Economy and Taxation' [2]. The core tenet of CAT is that trade is mutually beneficial even if one nation lacks an absolute advantage in any good. Ricardo demonstrated that what matters is relative efficiency or opportunity cost, not absolute productivity. Therefore, the statement claiming a nation without an absolute advantage cannot benefit from trade is incorrect; in fact, the theory specifically argues that such a nation can gain by specializing in commodities where its absolute disadvantage is least. By specializing in goods where they hold a comparative advantage and trading, both nations can achieve consumption levels beyond their individual production possibilities.

Sources

  1. [1] https://www.investopedia.com/terms/a/absoluteadvantage.asp
  2. [2] https://en.wikipedia.org/wiki/On_the_Principles_of_Political_Economy_and_Taxation
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