Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 19

When applied to international economics, the theory of comparative advantage proposes that total worldwide output will be greatest when:

Answer options

• A. Each nation's total imports approximately equal its total exports.
• B. Each good is produced by the nation that has the lowest opportunity cost for that good.
• C. Goods that contribute to a nation's balance-of-payments deficit are no longer imported.
• D. International trade is unrestricted and tariffs are not imposed.

Correct answer: B

Explanation

The correct answer, B, highlights that countries should specialize in producing goods for which they have the lowest opportunity cost, maximizing efficiency and output. Option A refers to trade balance but does not directly address comparative advantage. Option C incorrectly implies that imports should be limited based on trade deficits, and option D, while promoting free trade, does not specifically relate to how comparative advantage functions.