The correct answer is option (b) “comparative advantage.” In the classical model of Ricardo, trade between countries is indeed determined by comparative advantage. This concept, proposed by David Ricardo in the early 19th century, is a fundamental principle in international trade theory.

Let’s delve into why option (b) is the correct answer and why the other options (a, c, and d) are not accurate.

Correct Answer (b): Comparative Advantage

David Ricardo’s Theory of Comparative Advantage is a cornerstone of classical international trade theory. It explains why countries engage in trade and how trade patterns are determined. Here’s a detailed explanation of why option (b) is the correct answer:

1. Comparative Advantage:

Comparative advantage is the idea that countries should specialize in the production of goods and services in which they have a lower opportunity cost relative to other nations.

Opportunity cost is the value of the next-best alternative foregone when resources are allocated to a particular task. In the context of trade, it means that a country should produce the goods for which the cost of production is the lowest in terms of what else they could produce.

2. Mutually Beneficial Trade:

Ricardo’s theory shows that even if one country is less efficient in producing all goods compared to another country, there are still gains from trade. By specializing in the production of goods where they have a comparative advantage, countries can exchange these goods and both benefit.

Comparative advantage leads to mutually beneficial trade, as each country focuses on what it can produce most efficiently, leading to an efficient allocation of resources.

3. Example of the Wine and Cloth Model:

Ricardo illustrated the concept with a famous example involving two countries, Portugal and England, producing wine and cloth. Even if Portugal was less efficient than England in producing both wine and cloth, they could still benefit from trade.

Portugal could specialize in producing wine, where it had a lower opportunity cost, while England specialized in producing cloth. This specialization and trade allowed both countries to have more of both products than if they tried to produce both on their own.

4. The Principle of Comparative Advantage is Not Dependent on Absolute Advantage:

It is important to note that comparative advantage is distinct from absolute advantage, which is based on a country’s ability to produce goods more efficiently in absolute terms.

Comparative advantage considers relative efficiencies and opportunity costs. A country can have a comparative advantage in producing a good without having an absolute advantage in any area.

5. Ricardo’s Influence:

Ricardo’s Theory of Comparative Advantage had a profound influence on economic thought and international trade policy. It underlies the principles of free trade and the benefits of specialization, which are still widely discussed and applied in modern economics.

Incorrect Options and Explanations:

a. Absolute Advantage:

This option is incorrect because in the classical model of Ricardo, the direction of trade is determined by comparative advantage, not absolute advantage. Absolute advantage, as introduced by Adam Smith, suggests that countries should specialize in producing goods in which they have an absolute efficiency advantage, without considering opportunity costs.

c. Physical Advantage:

This option is incorrect because the classical model, as developed by Ricardo, does not consider physical advantage as the primary determinant of trade. It is the relative opportunity cost, or comparative advantage, that drives trade patterns, not physical attributes or resources.

d. Which Way the Wind Blows:

This option is incorrect because the direction of trade is not determined by the wind. Trade is based on economic principles and the concept of comparative advantage, as explained by Ricardo. The wind’s direction is unrelated to the core principles of international trade theory.

In conclusion, the correct answer is (b) comparative advantage, as Ricardo’s Theory of Comparative Advantage is a foundational concept in the classical model of international trade, explaining why countries engage in trade and how they determine the direction of trade.

Comparative advantage is based on opportunity costs and leads to mutually beneficial trade between countries. It is essential for understanding trade patterns and trade policy in economics.