Which of the following theories form the basis of international trade ? 1. Absolute cost difference 2. Comparative cost difference 3. Opportunity cost Select the correct answer using the code given below:

International trade is fundamentally based on several classical and modern economic theories. The theory of Absolute Cost Difference, pioneered by Adam Smith, suggests that countries should specialize in goods they can produce more efficiently than others [3]. David Ricardo expanded this into the Theory of Comparative Cost Difference, which posits that trade is mutually beneficial even if one country is more efficient in all goods, provided they focus on products with the lowest relative opportunity cost [1]. Furthermore, the Opportunity Cost Theory, introduced by Gottfried Haberler, refined these ideas by expressing the cost of a commodity in terms of the alternative production foregone. These principles collectively explain why nations engage in specialization and division of labor to maximize global output and welfare [1]. Modern trade also considers factors like distance, GDP, and trade agreements, which influence the actual flow and volume of goods between nations [2].

Sources

1. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 1: Introduction > Adam Smith > p. 4
2. [1] FUNDAMENTALS OF HUMAN GEOGRAPHY, CLASS XII (NCERT 2025 ed.) > Chapter 8: International Trade > Why Does International Trade Exist? > p. 72
3. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 13: International Organizations > Impact of these FTAs on trade: > p. 393