Final answer:
The Comparative Advantage Theory supports the idea of countries specializing where they have a comparative advantage, leading to a gain in total output. This theory is key to international trade and suggests that countries should specialize in producing goods with the lowest opportunity cost.
Step-by-step explanation:
The blank in the question should be filled with 'Comparative Advantage Theory', as it supports the idea that each nation should specialize where they have a 'comparative advantage', leading to a total gain in output from the same labor inputs. The concept of comparative advantage is fundamental in understanding the benefits of international trade. Unlike absolute advantage, where a country is more efficient at producing all goods, comparative advantage suggests specializing in the production of goods where the country is relatively more efficient or has a lower opportunity cost. This specialization allows nations to maximize their efficiency and the total global production, as David Ricardo famously argued.
The process to determine comparative advantage involves comparing opportunity costs between countries. For example, if a country can produce a good at a lower opportunity cost than another country, it has a comparative advantage in producing that good and should specialize in it. As a result, when each country focuses on producing goods where they have a comparative advantage, the total output increases, and all trading partners can benefit from higher levels of production and consumption than would be possible without trade.