Question

The basis of international trade is _________.

• A. Only absolute advantage
• B. Only comparative advantage
• C. Both A and B
• D. Exchange Rate

Answer 1

Answer: (C)

Both A and B

International Trade refers to the exchange of products and services from one country to another. Differences in cost form the basis of trade. Differences in cost may be two types: (i) absolute cost difference, and (ii) comparative cost difference. In 1776, Adam Smith argued that absolute cost difference or absolute advantage is the basis of trade.