Which of the following statements are correct about International Trade Theories?

(A) According to mercantilism, countries should import more than they export.
(B) A country that practices neo-mercantilism attempts to run, export surplus to achieve a social or political objective.
(C) Theory of absolute advantage reasoned that restricted trade would lead country to specialize in those products that gave it a competitive advantage.
(D) According to theory of comparative advantage gains from trade will occur even in a country that has absolute advantage in all products because the country must give up less efficient output to produce more efficient output.

Choose the correct answer from the options given below:

Correct option is D

• Statement (A) is incorrect. Mercantilism advocates for more exports than imports to accumulate wealth through a positive trade balance. The given statement wrongly says countries should import more.

• Statement (B) is correct. Neo-mercantilism indeed supports export surpluses, not purely for economic gains, but also to achieve broader social or political objectives, such as national strength or employment generation.

• Statement (C) is incorrect. The theory of absolute advantage, proposed by Adam Smith, encourages free trade, not restricted trade. It posits that countries should specialize in producing goods where they have an absolute advantage and trade with others.

• Statement (D) is correct. The comparative advantage theory by David Ricardo states that a country can still benefit from trade even if it is more efficient in producing all goods. Gains arise from specializing in goods where the opportunity cost is lowest.

Thus, the correct pair of statements is (B) and (D).

Information Booster:

• Neo-mercantilism emphasizes state intervention in trade to promote exports and reduce reliance on imports.

• It focuses on maintaining employment, foreign exchange reserves, and strategic industries.

• Countries like Japan and China have used neo-mercantilist strategies in the past.

• Comparative advantage introduces the idea of opportunity cost in trade decision-making.

• Even if a nation can produce all goods more efficiently, trade is beneficial if it focuses on products with lowest relative cost.

• Comparative advantage supports global trade liberalization and specialization, leading to greater overall economic efficiency.

• David Ricardo's theory helps explain why trade happens even when one nation is more productive across all sectors.

Additional Knowledge:

Option A (Incorrect):

• Mercantilism (16th to 18th century) advocated for export maximization and import minimization.

• The goal was to build national wealth through accumulating gold/silver reserves.

• Policies included tariffs, colonial control, and protectionist measures, not increasing imports.

Option C (Incorrect):

• Absolute advantage, proposed by Adam Smith, does not recommend restricted trade.

• It promotes open markets, encouraging nations to produce goods they can make more efficiently.

• The incorrect part of the statement is "restricted trade", which contradicts Smith’s idea of free trade leading to wealth creation.