The correct answer is option A: “countries specializing in the production of goods they are best suited for.”

Free international trade is a fundamental economic concept that has far-reaching implications for the global economy. It is based on the principle of comparative advantage, which states that countries can benefit from specializing in the production of goods and services in which they have a relative efficiency or lower opportunity cost compared to other nations.

Let’s delve into why option A is correct and why the other options are not accurate in explaining how free international trade maximizes world output.

Option A:

Countries specializing in the production of goods they are best suited for This option correctly describes the essence of free international trade. When countries engage in free trade, they can focus on producing the goods and services they are most efficient at producing, given their available resources, technology, and expertise.

This concept is known as comparative advantage. By specializing in the production of these goods, countries can produce more output with the same or fewer resources, leading to increased efficiency and productivity. When countries specialize and then trade with each other, they can obtain a wider variety of goods and services at lower costs, ultimately maximizing world output.

Here’s why the other options are not correct:

Option B:

Reduction in taxes While reducing taxes can have a positive impact on economic activity and trade, it is not the primary mechanism through which free international trade maximizes world output.

The key driver of increased world output in free trade is the efficient allocation of resources through specialization and comparative advantage, as described in option A. Taxes can influence trade indirectly by affecting the cost structure of goods and services, but they are not the primary focus of the theory of comparative advantage.

Option C:

Increased factor income Increased factor income, while important for the well-being of a country, is not the primary goal of free international trade. The primary objective is to maximize world output and overall economic welfare by allowing countries to specialize and produce efficiently.

Factor income refers to the income earned by factors of production such as labor and capital. Free trade can lead to increased factor income in the long run by promoting economic growth, but it is not the direct mechanism through which trade maximizes world output.

Option D:

Encouraging competition Competition is indeed a fundamental aspect of free international trade, and it can lead to increased efficiency and innovation. However, the primary mechanism that drives increased world output in free trade is comparative advantage and specialization (as explained in option A).

Competition can enhance the efficiency of production and lead to better allocation of resources, but it is a means to an end rather than the end itself. The primary goal of free trade is to allow countries to specialize and produce the goods they are best suited for, which, in turn, encourages competition as a natural consequence.

In conclusion, option A accurately describes how free international trade maximizes world output by allowing countries to specialize in the production of goods and services they are best suited for.

This specialization leads to increased efficiency, productivity, and ultimately, a higher overall level of global economic output. While the other options (B, C, and D) are relevant factors in the context of international trade, they are not the primary drivers of increased world output as described by the theory of comparative advantage.