In international trade, what is the core idea behind comparative advantage?

• A. Countries should specialize in goods with the highest opportunity cost.
• B. Trade increases overall welfare.
• C. Trade reduces welfare.
• D. Countries should specialize in goods with the lowest opportunity cost.

Answer: (D)

Comparative advantage is about opportunity costs guiding specialization. A country should focus on producing the goods for which its opportunity cost is the lowest relative to other countries. By doing this, resources are used where they are most productive, and trade allows both sides to enjoy more than they could produce alone. So specializing in goods with the lowest opportunity cost is the best description. The idea that you should specialize in the highest opportunity cost would be the opposite of what makes trade beneficial, and while trade generally raises welfare, the defining rule is choosing the lowest opportunity cost. Saying trade reduces welfare is incorrect.