According to the theory of comparative advantages, countries are to specialize based on their
A. absolute cost advantages B. absolute cost disadvantages C. comparative cost advantages D. comparative cost disadvantages E. the availability of labour
Correct Answer: C
Explanation
The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare. The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.
