Q.The principle that a country gains by specialising in producing the good or service it can produce at the lowest relative cost, and importing the rest, is known as:

This principle explains why trade benefits countries even when one of them could produce everything more efficiently than the other, because what matters is relative efficiency, not absolute efficiency.

This question tests the specific economic principle underlying the need for international trade.

Option (A) Absolute advantage — this refers to a country being able to produce a good using fewer resources than another country, in absolute terms. It does not, by itself, explain why trade benefits a country that is less efficient at producing everything; that gap is filled by comparative advantage instead. Not the best answer here.

Option (B) Comparative advantage — this is the principle described exactly: a country specialises in and exports the good or service it can produce at the lowest RELATIVE opportunity cost, and imports what other countries can produce relatively more efficiently. This explains why trade benefits both a highly efficient and a less efficient economy. This is the correct answer. …

Students often confuse absolute advantage (who is simply better at producing something) with comparative advantage (who is relatively better, considering opportunity cost) — remember that comparative advantage is the pri …