CAPF AC 2025 Q13: Indian Economy – External Sector & Balance Of Payments
- (a) David Ricardo was the author of the CAT.
- (b) The CAT is explained in the book titled On the Principles of Political Economy and Taxation that was first published in 1817.
- (c) According to the CAT, the nation which does not have absolute advantage in any goods cannot benefit from trade.
- (d) The two nations that engage in trade can gain from specializing in the commodity in which they have a comparative advantage.
Answer: (c) According to the CAT, the nation which does not have absolute advantage in any goods cannot benefit from trade.
Explanation
Comparative advantage
How to think: the question asks for the statement that is not correct.
The key idea of Ricardo: trade can help both nations even when one is better at making everything, because what matters is the opportunity cost, not absolute cost.
| Statement | Fact | Verdict |
|---|---|---|
| a. David Ricardo authored it | The theory is Ricardo's | True |
| b. Explained in *On the Principles of Political Economy and Taxation*, first published 1817 | Correct title and year | True |
| c. A nation with no absolute advantage cannot benefit from trade | Wrong: it can gain by specialising in the good where its opportunity cost is lower | Not correct |
| d. Both nations gain by specialising in the good of comparative advantage | The central result of the theory | True |
Answer: (c).
Why each option is right or wrong
- (a) Incorrect. This statement is true, so it is not the answer to 'not correct'.
- (b) Incorrect. This statement is true: the book was published in 1817.
- (c) CORRECT. A nation can gain from trade even without any absolute advantage.
- (d) Incorrect. This statement is true and is the core of the theory.
Key point
Ricardo, On the Principles of Political Economy and Taxation (1817): comparative advantage = lower opportunity cost. Example: England cloth, Portugal wine. Adam Smith: absolute advantage (The Wealth of Nations, 1776).
Remember
Comparative advantage: even the weaker nation gains from trade.
Common mistakes
- Mixing up absolute advantage (Smith) with comparative advantage (Ricardo).
- Missing the word not in the question.
- Thinking a weaker nation has nothing to export.
Exam tip
Educated guess: the whole point of the theory is that trade helps everyone. A statement saying a nation 'cannot benefit' goes against it.
Sources
- David Ricardo, On the Principles of Political Economy and Taxation (1817), Chapter 7: On Foreign Trade
- N. Gregory Mankiw, Principles of Economics, Chapter 3 (Interdependence and the Gains from Trade)