Which statement captures Krugman's critique of Ricardian comparative advantage?

• A. Absolute advantage as the sole basis for trade
• B. Currency instability undermines trade
• C. Scale economies and consumer preferences that favor large-scale production
• D. Tariffs always improve welfare

Answer: (C)

Krugman’s critique centers on scale economies and consumer demand for variety shaping trade, not just differences in productivity. When producing at larger scales lowers average costs and people care about having more choices, firms gain from expanding output and selling into bigger markets. This leads to intra-industry trade and a pattern where countries export and import similar goods, with variety and efficiency gained from larger production runs. So, trade can arise even when one country isn’t more productive in every good, because economies of scale and preferences for variety matter. The statement that best captures this is about scale economies and large-scale production driven by consumer demand. Absolute advantage alone, currency issues, or tariffs don’t capture this Krugmanian insight.