Question

Which of the following theories identifies specialization as a reason for international business?

1) theory of comparative advantage
2) imperfect markets theory
3) product cycle theory
4) None of these are correct

Answer 1

The theory of comparative advantage explains why countries engage in international business by specializing in production where they have lower opportunity costs, leading to gains of trade.

Step-by-step explanation:

The theory that identifies specialization as a reason for international business is the theory of comparative advantage. Absolute advantage refers to a country's ability to produce more of a good or service with the same amount of resources as other countries, while comparative advantage occurs when a country can produce a particular good or service at a lower opportunity cost than others. By specializing in goods where they hold a comparative advantage, countries can enjoy the gains of trade through efficient production and beneficial trading partnerships, ultimately enhancing overall global welfare.