Question

Absolute advantage
A. is a concept Adam Smith used to illustrate how gains from trade could arise.
B. not relevant since absolute advantage is not the source of gains from trade.
C. states that a country with the lower opportunity cost of producing a good will export it.

D. All of the above.

Answer 1

Before checking the options, let's define Absolute Advantage and Comparative Advantage.

Absolute Advantage is reffered to the production capability of efficiency of a Nation. And, Comparative Advantage is reffered to the opportunity cost of production in a Nation and it is the source of gains from trade.

Now, let us check the following options one by one that defines the Absolute Advantage properly.

✓ Option (A): The concept of Absolute Advantage was introduced by Adam Smith to describe a party's or a Nation's production capability. How efficient a nation or a party is produce a certain commodity, is conceptualized by Absolute Advantage.

But is does not talk about the subject that, how the gains of trade could arise. The gains of trade is determined by the Comparative Advantage. Hence, this option is incorrect.

Option A is incorrect.

✓ Option (B): From the trade theories, we get to know that, the Comparative Advantage is the source of gains from trade, but Absolute Advantage is not. Hence, Absolute Advantage is not relevant in that case. This option is correct.

Option B is correct.

✓ Option (C): The opportunity cost is represented with the concept of Comparative Advantage, not with Absolute Advantage. Compararive Advantage states that a country with the lower opportunity cost of producing a good will export it. Hence, this option is also incorrect.

Option (C) is incorrect.

Option (D) can not be correct.

The answer is Option (B).

Hope the explanation is clear to you my friend.