Which statement about comparative advantage is true?

• A. Comparative advantage states that nations should produce only where they have an absolute advantage.
• B. Comparative advantage suggests nations should specialize in goods with the greatest relative efficiency.
• C. Comparative advantage implies trade raises overall welfare.
• D. Comparative advantage requires perfect competition in all markets.

Answer: (C)

Comparative advantage shows that trade makes everyone better off when countries specialize in producing goods they can produce at a lower opportunity cost and then trade. Because each country sacrifices less of one good to produce another, resources are used more efficiently, total output grows, and both sides can consume more than they could without trade.

That’s why the statement that trade raises overall welfare is the best fit. It captures the core idea that choosing production based on lower opportunity costs leads to gains from exchange.

The other ideas aren’t the defining point. Producing only where there is absolute advantage isn’t required—countries can gain from trade even if they have no absolute edge in any good. Specializing in the goods with the greatest relative efficiency is related, but the precise condition is lower opportunity cost, not merely relative efficiency. And perfect competition in all markets isn’t a necessary requirement for comparative advantage to yield welfare gains, though many models use it as a simplifying assumption.