The assumptions of the principles of comparative cost advantage is based on I. Absence of Trade Restrictions II. No transport costs III. Constant technology

Analyze the question: You are asked which of the statements are assumptions of the principle of comparative cost (comparative advantage) in international trade.

Concept: David Ricardo's theory of comparative advantage says a country should specialize in producing goods it can make at a lower opportunity cost, then trade with other countries. The theory rests on several simplifying assumptions:

1. Two countries and two commodities (a two-by-two model)
2. Free trade, meaning no tariffs, quotas or other trade restrictions
3. No transport costs between the trading countries
4. Constant technology, so production techniques stay the same
5. Perfect mobility of factors within a country, but immobility between countries
6. Constant returns to scale (or constant costs)
7. Full employment

Checking each statement:

• I. Absence of trade restrictions: This is an assumption, because free trade is required for specialization and exchange to work.
• II. No transport costs: This is an assumption, because transport costs would reduce or erase the gains from trade.
• III. Constant technology: This is an assumption, because the cost ratios are taken as fixed, so technology must not change.

All three statements are valid assumptions of the theory.

Correct answer: C (I, II & III only)

Exam tip: Remember the assumptions as "FTT": Free trade, Transport costs absent, Technology constant. If a question asks about the assumptions of comparative advantage, these three are almost always among the correct choices.