The correct answer is (d) there is no basis for gainful specialization and trade according to the principle of absolute advantage. The principle of absolute advantage, which was developed by economist Adam Smith, suggests that a country should specialize in producing and exporting goods in which it has an absolute advantage.

An absolute advantage means that a country can produce a good more efficiently or with fewer resources compared to another country. When no such absolute advantage exists, it would be inefficient for a country to specialize in producing any particular good, and there would be no basis for gainful specialization and trade.

Let’s explore why this answer is correct and why the other options are not:

(d) There is no basis for gainful specialization and trade:

The principle of absolute advantage focuses on the inherent efficiency of a country in producing goods. According to this principle, a country should specialize in producing and exporting goods in which it has an absolute advantage over other countries, and it should import goods in which it does not have an absolute advantage.

If a country does not have an absolute advantage in the production of any specific goods, it implies that its production capabilities are not significantly better than those of other countries in any particular industry.

In such a scenario, there is no basis for gainful specialization and trade because specialization is predicated on producing goods more efficiently than trading partners, which is not the case in this situation.

Now, let’s examine why the other options are not correct:

(a) Export steel:

This option is not necessarily correct based solely on the principle of absolute advantage. The principle of absolute advantage does not specify what a country should export or import in the absence of a clear-cut advantage in the production of certain goods.

If a country had an absolute advantage in the production of steel, it might consider exporting steel. However, the principle of absolute advantage does not address the situation where a country lacks an absolute advantage in any industry, which is the scenario described in the question.

(b) Export DVDs:

Similar to option (a), the principle of absolute advantage does not inherently dictate that a country should export DVDs. Exporting DVDs would be appropriate if a country had an absolute advantage in the production of DVDs, meaning it could produce them more efficiently than other countries.

However, if a country lacks an absolute advantage in any industry, the principle of absolute advantage does not provide guidance on what to export.

(c) Export steel and DVDs:

This option is not correct because it combines options (a) and (b) and assumes that a country has an absolute advantage in both steel and DVD production. According to the principle of absolute advantage, a country should specialize in producing and exporting goods in which it has a clear absolute advantage.

It doesn’t require a country to have an absolute advantage in every industry simultaneously. If a country lacks an absolute advantage in both steel and DVD production, it would not be advisable for it to specialize in exporting both of these goods.

In summary, the principle of absolute advantage, as articulated by Adam Smith, suggests that a country should specialize in producing and exporting goods in which it has an absolute advantage.

When a country lacks an absolute advantage in the production of any specific goods, there is no clear basis for gainful specialization and trade. Options (a), (b), and (c) assume that a country has an absolute advantage in certain industries, but they do not address the situation described in the question where there is no such advantage, making option (d) the correct choice.