Question

Given below are two statements: one is labelled as Assertion A and the other is labelled as Reason R. Assertion A: According to Ricardo's theory a country can benefits from trade even if it has an absolute disadvantage in the production of all the goods. Reason R: What matters for trade is comparative advantage which depends on relative not absolute cost differences.

• A. Both A and R are correct and R is the correct explanation of A
• B. Both A and R are correct but R is NOT the correct explanation of A
• C. A is correct but R is not correct
• D. A is not correct but R is correct

Hint:

Ricardo's theory is based on comparative advantage. Trade depends on relative cost differences, not absolute cost differences.

Answer 1

The Correct Option is A

Concept: Ricardo's theory of comparative advantage explains that countries can gain from trade even when one country is less efficient in producing all goods.

Step 1: Check Assertion A.
According to Ricardo, even if a country has an absolute disadvantage in all goods, it can still gain from trade by specialising in the good in which it has the least relative disadvantage. So Assertion A is correct.

Step 2: Check Reason R.
Reason R says that trade depends on comparative advantage, which is based on relative cost differences, not absolute cost differences. \[ \text{Comparative Advantage} \Rightarrow \text{Relative cost difference} \] This statement is also correct.

Step 3: Check whether R explains A.
Reason R explains Assertion A because the possibility of trade gains exists due to comparative advantage, even when absolute advantage is absent. Therefore, both A and R are correct and R is the correct explanation of A.