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:

Option C – comparative cost advantages

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.