Ricardo's theory showed that if nations are allowed to trade freely, the result will be that:
A) all trading nations benefit by trade.
B) the manufacturing sector benefits but the consumers lose out.
C) workers benefit but the government loses tax revenue.
D) the gains from trade offset the losses from trade exactly.

Question

Quizplus · Accepted Answer

Ricardo's theory of comparative advantage showed that if nations are allowed to trade freely, all trading nations benefit by trade. This is because they can specialize in the production of the goods in which they have a comparative advantage and trade for other goods they need. This results in more efficient allocation of resources, increased output, and ultimately greater benefits for all trading partners. Choice B is incorrect as Ricardo's theory suggests that both producers and consumers benefit from trade. Choice C is incorrect as the government can also benefit from increased trade through increased tax revenue from increased economic activity. Choice D is incorrect as there may be winners and losers in trade, but overall the gains from trade are greater than the losses.

Ricardo's Theory Showed That If Nations Are Allowed to Trade