International TradePYQ - May 2018 (Inter)Question 173 of 20
All Questions

Which theory emphasizes absolute cost advantage?

Options

ARicardo
BAdam Smith
CHeckscher
DOhlin
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Correct Answer

✅ Option b — Adam Smith

All Options:

  • ARicardo
  • BAdam Smith
  • CHeckscher
  • DOhlin

Detailed Solution & Explanation

To determine which theory emphasizes absolute cost advantage, let's break it down: • The concept of absolute cost advantage is related to the idea that a country can produce a good at a lower cost than another country, regardless of the other country's production levels. • This concept is closely associated with the theory of absolute advantage, which was introduced by Adam Smith in his book "The Wealth of Nations". • According to Adam Smith, a country should specialize in producing goods for which it has an absolute advantage, meaning it can produce them at a lower cost than other countries. • In contrast, the theories of Ricardo, Heckscher, and Ohlin focus on comparative advantage, which is a different concept that emphasizes the relative efficiency of production between countries. • For example, Ricardo's theory of comparative advantage suggests that countries should specialize in producing goods for which they have a lower opportunity cost, not necessarily an absolute cost advantage. • Therefore, the correct answer is the one associated with Adam Smith, as his theory is the one that emphasizes absolute cost advantage.

About This Chapter: International Trade

Paper

Paper 4: Business Economics

Weightage

10%

Key Topics

Theories, Trade Policy, Exchange Rates

This chapter explores trade between nations — why countries trade, the theories of Absolute and Comparative Advantage, Balance of Payments, Exchange Rate systems (Fixed vs Flexible), and India's trade policy including tariffs, quotas, and WTO rules.

View Official ICAI Syllabus

Exam Strategy Tip

Understand Comparative Advantage theory thoroughly — it's the foundation of international trade. Also focus on the Balance of Payments structure and what causes deficits.

More Questions from International Trade

Exchange rate determined by market forces is called:

Tariffs generally:

Balance of Trade refers to:

WTO was established in:

Devaluation of currency encourages:

Comparative Cost Advantage theory was given by:

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