Question

According to the law of comparative advantage, trade will not be beneficial for both countries if 

(A) One nation is less efficient than the other nation in the production of both commodities. 
(B) One nation has an absolute advantage with respect to the other nation in the production of both commodities. 
(C) The opportunity cost of producing both the commodities is the same in both countries. 
(D) The absolute disadvantage that one nation has with respect to the other nation is the same in both commodities. 
Choose the correct answer from the options given below:
 

• A. (A) only
• B. (A) and (B) only
• C. (C) and (D) only
• D. (B), (C) and (D) only

Hint:

For trade to be beneficial, countries should specialize in the goods for which they have a comparative advantage, not an absolute advantage.

Answer 1

The Correct Option is C

Step 1: Understand the law of comparative advantage.
The law of comparative advantage suggests that trade between two countries will be beneficial if each country specializes in the production of goods for which it has a lower opportunity cost than the other.

Step 2: Analysis of options.
- (A) One nation is less efficient than the other nation in the production of both commodities: This is incorrect. Even if one nation is less efficient in producing both goods, trade can still be beneficial if each nation has a comparative advantage in one of the goods.
- (B) One nation has an absolute advantage with respect to the other nation in the production of both commodities: This is incorrect. Absolute advantage does not determine trade benefits. Comparative advantage, which involves lower opportunity costs, is the key factor.
- (C) The opportunity cost of producing both the commodities is the same in both countries: This is correct. If opportunity costs are the same, there is no incentive for trade, as no country has a comparative advantage.
- (D) The absolute disadvantage that one nation has with respect to the other nation is the same in both commodities: This is correct. If the disadvantage is the same for both countries, there is no basis for trade to be mutually beneficial.

Step 3: Conclusion.
The correct answer is (C) and (D) only.