Question 30

The statement describes the concept of comparative advantage.

Each country should focus on producing goods and services in which they hold a relative efficiency advantage, thereby maximizing overall economic productivity through specialization and trade.

A) Protectionism

Protectionism refers to governmental policies that restrict international trade to protect domestic industries from foreign competition. This concept contrasts with the idea presented in the statement, which advocates for free trade based on efficiency rather than imposing barriers.

B) Diminishing returns

Diminishing returns is an economic principle stating that as more resources are allocated to a particular area of production, the incremental output gained from those additional resources will eventually decline. This concept does not align with the notion of countries specializing in what they produce most efficiently.

C) Command economy

A command economy is characterized by the government making all decisions about the production and distribution of goods and services. This is contrary to the principle of comparative advantage, where market forces and efficiencies dictate production decisions rather than central planning.

D) Comparative advantage

Comparative advantage is the economic principle that suggests countries should specialize in producing goods where they have a lower opportunity cost and trade with others to obtain goods that are more costly for them to produce. This concept perfectly aligns with the statement, emphasizing efficiency and specialization in international trade.

Conclusion

The concept of comparative advantage is definitively the correct answer as it encapsulates the idea of countries producing what they can make most efficiently and trading for other goods. In contrast, protectionism, diminishing returns, and command economy do not support the principle of specialization and mutual trade benefits, thus failing to represent the core concept tested.