UPSC CDS GS Economy Questions Part 2

All the statements form the bases of international trade. Adam Smith propounded the theory of absolute cost advantage/difference as the basis of foreign trade. Under such circumstances, an exchange of goods will take place only if each of the two countries can produceone commodity at an absolutely lower production cost than theother country. David Ricardo developed the classical theory ofcomparative advantage in 1817. The principle of comparative costsis based on the differences in production costs of similar commodities in different countries. Production costs differ in countries because of the geographical division of labour and specialisation in production. The opportunity cost of a commodity, say wheat, is the amount of another commodity, say cloth, which a country has to give up to produce an additional unit of wheat. Thus, the opportunity cost measures the ratio of marginal costs of the two commodities.