Comparative Advantage Defined by Opportunity Cost

Steps:

• Identify the key element in the statement: lower opportunity cost for production.
• Recall definitions: absolute advantage focuses on total output efficiency, while comparative advantage emphasizes relative opportunity costs.
• Compare the statement to economic principles: it matches the core of comparative advantage theory.
• Eliminate unrelated concepts: specialization follows from advantages, and terms of trade involve exchange ratios.

Why B is correct:

• Comparative advantage occurs when a country produces a good at a lower opportunity cost than another, as per David Ricardo's theory, enabling mutual gains from trade.

Why the others are wrong:

• A: Absolute advantage requires producing more units with the same resources, not lower opportunity cost.
• C: Specialisation is the process of focusing production based on advantages, not the advantage itself.
• D: Terms of trade refer to the exchange rate between exports and imports, unrelated to production costs.

Final answer: B