Final answer:
The Theory of Comparative Advantage identifies specialization as the key driver of international business activity, explaining that countries trade due to their ability to produce goods at a lower opportunity cost, leading to gains from international trade.
Step-by-step explanation:
The theory that identifies specialization as the main reason for international business activity is the Theory of Comparative Advantage. This theory explains that countries trade because they have different comparative advantages, allowing them to produce certain goods at a lower opportunity cost than other countries. The concept of absolute advantage refers to the ability of a country to produce more of a good using a given amount of resources than another country.
Comparative advantage arises when a country can produce a good at a lower opportunity cost compared to others, which is the basis for trade gains when countries specialize. Opportunity costs represent the potential benefits that are foregone from choosing one alternative over another. By specializing in the production of goods where they hold a comparative advantage, countries can trade with each other, leading to gains from international trade. This specialization and trade allow countries to enjoy a greater variety of goods and services than they could produce on their own.