The correct answer is option “b. interindustry specialization and trade.” The comparative advantage model developed by David Ricardo was indeed based on the concept of interindustry specialization and trade. Let’s provide a detailed explanation of why this is the case and why the other options are not correct:

Correct Answer (b): b. Interindustry specialization and trade

Explanation:

David Ricardo’s theory of comparative advantage, proposed in the early 19th century, is a fundamental concept in international trade. It is based on the idea of interindustry specialization and trade. In this model, different countries specialize in the production of goods in which they have a comparative advantage, and then they trade these goods with other countries.

This specialization is driven by differences in relative opportunity costs. According to the theory, even if one country is less efficient at producing all goods compared to another country, it can still have a comparative advantage in one of those goods.

By specializing in producing the good in which it has a comparative advantage and trading with other countries, both nations can benefit. Comparative advantage is not determined by absolute efficiency but by relative efficiency or opportunity cost.

Ricardo’s famous example, using England and Portugal, illustrates this concept. Suppose Portugal is more efficient at producing wine, and England is more efficient at producing cloth.

By each country specializing in the production of the good at which it is relatively more efficient (Portugal producing wine, England producing cloth) and then trading these goods, both countries can increase their overall consumption and economic welfare. This is the essence of the comparative advantage model, which is based on interindustry specialization and trade.

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

a. Intraindustry specialization and trade:

Intraindustry specialization and trade involve countries specializing in the production of similar goods within the same industry. This concept is different from Ricardo’s comparative advantage model, which is based on interindustry specialization and trade. In the comparative advantage model, countries specialize in the production of goods from different industries in which they have a comparative advantage.

The focus is on the differences between industries, not within a single industry. Intraindustry specialization and trade are relevant in situations of product differentiation, economies of scale, and other factors that lead to countries trading similar products within the same industry.

c. Demand conditions underlying specialization and trade:

Ricardo’s comparative advantage theory does not primarily focus on demand conditions but rather on production and opportunity costs. The theory explains how countries should specialize in the production of goods in which they have a comparative advantage, regardless of the demand conditions underlying specialization and trade.

It is based on the idea that differences in production efficiency, not demand conditions, should guide specialization. While demand conditions can influence the volume of trade and the prices of goods, the core of Ricardo’s theory is about relative production efficiency.

d. Income conditions underlying specialization and trade:

The comparative advantage model is primarily concerned with production efficiency and opportunity costs, not income conditions. It suggests that countries should specialize in the production of goods where they have a comparative advantage, as determined by their relative efficiency in production.

Income conditions may indirectly affect the patterns of specialization and trade, but they are not the basis of Ricardo’s theory. Instead, the focus is on the relative cost of production and the gains from trade that result from specialization based on these differences in costs.

In summary, the correct answer is option “b. interindustry specialization and trade” because David Ricardo’s comparative advantage model is built upon the concept of specialization between industries, where countries specialize in the production of goods in which they have a comparative advantage and then engage in trade.

The theory is not based on intraindustry specialization, demand conditions, or income conditions but rather on differences in production efficiency and opportunity costs between industries.