Question

Following Ricardo’s reasoning leads nations to focus on producing the goods and services at which they are most efficient, a practice called A. absolute advantage B. productivity C. specialization D. investment

Short answer

C. Specialization

Step-by-step solution

Understand the Context

Ricardo's reasoning in economics suggests that nations should produce the goods and services for which they have the greatest efficiency compared to others.

Identify the Keywords

Focus on keywords like 'most efficient' and 'producing the goods and services' to understand what the practice is called.

Evaluate the Options

Consider each option in the context of economic theories:A. Absolute Advantage: This refers to the ability of a nation to produce more of a good with the same amount of resources compared to another nation, but it doesn't focus solely on efficiency.B. Productivity: While related, this term refers to the rate at which goods or services are produced, not necessarily the specific reason behind choosing what to produce.C. Specialization: This is the practice of focusing resources on producing certain goods or services for which the nation is most efficient.D. Investment: This refers to the allocation of resources for future benefits and is not directly related to the concept of focusing production on areas of efficiency.

Choose the Correct Answer

Based on the evaluation, the correct answer is C. Specialization. This aligns with Ricardo’s reasoning that nations should concentrate on producing goods and services where they have the highest efficiency.

Key concepts

Comparative Advantage

The foundation of Ricardo’s theory is the concept of comparative advantage. It means that even if one country can produce everything more efficiently than another, there are still benefits to trade. Each country should concentrate on producing goods where it has the lowest opportunity cost.
Opportunity cost is what you give up to do something else. For example, if Country A is better at making both cars and computers than Country B, but it's even better at making cars, it should focus on cars. Country B should stick to making computers and trade with Country A.
This way, both countries can make the most of their resources and trade to get what they need, making them both better off.

Productive Efficiency

Productive efficiency is about making the best use of resources to produce goods and services. When a country is productively efficient, it means it’s impossible to produce more of one thing without making less of another.
Imagine a factory that can either make 100 cars or an equivalent amount of 80 trucks using all its resources. If it produces 60 cars and 40 trucks, it’s not productively efficient. It’s missing out on the opportunity to maximize its output.
Specialization, driven by comparative advantage, helps nations achieve productive efficiency. They avoid wasting resources by focusing on producing what they are really good at.
This leads to increased overall efficiency and helps in reducing costs.

Ricardo's Theory

David Ricardo, a classical economist, introduced the theory that explains the benefits of trade and specialization. His theory is based on the concept of comparative advantage.
Ricardo argued that even if one country is more efficient in producing all goods, international trade can still be beneficial. By focusing on goods that a country can produce most efficiently, it can trade for other goods.
This way, all participating countries can enjoy a greater variety of products and services than they could produce on their own. This specialization leads to more effective resource use and higher living standards.

• Example: If Country X can produce both wine and cloth more efficiently than Country Y, but has a larger edge in producing wine, Country X should specialize in wine. Country Y, while less efficient, should produce cloth and trade with Country X.