The correct answer is actually not option (a) but option (c), the “Theory of comparative advantage.” John Stuart Mill is indeed associated with this theory, which is a fundamental concept in economics. Let’s explain in detail why the correct answer is (c) and why the other options (a, b, and d) are not accurate.

Correct Answer (c): Theory of Comparative Advantage

John Stuart Mill is known for his significant contributions to economics and, in particular, for developing the Theory of Comparative Advantage.

This theory is a fundamental concept in international trade and explains why countries should specialize in the production of goods and services in which they have a comparative advantage, even if they do not have an absolute advantage in producing those goods.

Here’s a detailed explanation of why option (c) is the correct answer:

1. Comparative Advantage:

The Theory of Comparative Advantage argues that countries should specialize in the production of goods and services where they can produce at a lower opportunity cost relative to other nations. In other words, even if a country is not the absolute best at producing a particular item, it should focus on producing what it can produce most efficiently compared to other goods.

2. Opposite of Absolute Advantage:

The theory stands in contrast to the Theory of Absolute Advantage, which was put forth by Adam Smith. Absolute advantage suggests that a country should specialize in producing goods it can produce most efficiently in absolute terms, while comparative advantage considers the opportunity cost of producing various goods.

3. Efficiency and Trade Benefits:

The Theory of Comparative Advantage emphasizes that when countries specialize based on their comparative advantage, global economic efficiency increases. It leads to the maximization of total production and trade benefits for all countries involved, as they can exchange their specialized goods and services.

4. Mutually Beneficial Trade:

This theory supports the idea that even if one country is less efficient at producing everything compared to another country, trade can still be mutually beneficial because each country specializes in what it does relatively better. This concept has profound implications for international trade policy and the gains from trade.

5. John Stuart Mill’s Contributions:

John Stuart Mill, a 19th-century philosopher and economist, extended and refined the Theory of Comparative Advantage, making it a cornerstone of modern economic thought. His work on this theory helped shape international trade policies and laid the foundation for understanding the advantages of specialization and trade.

Incorrect Options and Explanations:

a. Theory of Reciprocal Demand:

This option is incorrect because John Stuart Mill is not associated with the Theory of Reciprocal Demand. This theory, also known as the “Law of Markets,” was primarily developed by Antoine Augustin Cournot and elaborated upon by Alfred Marshall. It deals with the interactions of supply and demand in markets.

b. Theory of Absolute Advantage:

This option is incorrect because the Theory of Absolute Advantage was introduced by Adam Smith, not John Stuart Mill. Adam Smith’s theory suggests that countries should specialize in producing goods in which they have an absolute advantage, meaning they can produce more efficiently than other countries, without considering opportunity costs.

d. Theory of Mercantilism:

This option is incorrect because John Stuart Mill did not found the Theory of Mercantilism. Mercantilism was a dominant economic theory in the 16th to 18th centuries, which emphasized the accumulation of gold and silver as a measure of a nation’s wealth and promoted policies such as protectionism and colonialism.

Mill’s contributions were more aligned with classical economics and the Theory of Comparative Advantage, which followed the mercantilist era.

In summary, John Stuart Mill is most well-known for his contributions to the Theory of Comparative Advantage, which explains why countries should specialize in the production of goods and services based on their relative efficiency, even if they lack an absolute advantage.

This theory has had a profound impact on international trade theory and policy, promoting the benefits of specialization and global trade.