Nations engage in international trade because of difference in?

Step 1: Analyze the question The question asks for the basic reason nations trade with each other. The key phrase is "difference in ___".

Step 2: Explain the concept Countries differ in their resources, climate, technology, and labour skills. Because of this, each country can produce some goods at a lower opportunity cost than others. This is the principle of comparative advantage (or comparative cost), developed by David Ricardo.

• A country should specialize in the good it produces at a relatively lower opportunity cost.
• It then exports that good and imports the goods it produces less efficiently.
• Both countries gain, even if one is better at producing everything (absolute advantage).

Step 3: Evaluate the options

• A. Absolute cost: This explains trade only when each country is the most efficient producer of a different good. It does not explain trade when one country is better at everything, so it is not the general basis for trade.
• B. Comparative cost: This is the general basis of international trade. Differences in opportunity cost make specialization and exchange beneficial.
• C. Fixed cost: This is a production cost that does not change with output (e.g., rent). It is unrelated to why nations trade.
• D. Variable cost: This is a cost that changes with output (e.g., raw materials). It is also unrelated.

Step 4: Answer The correct option is B. comparative cost.

Exam tip: Whenever you see "why countries trade" or "basis of international trade" in Economics, think comparative advantage/cost. Remember: Comparative = Opportunity cost differences = Gains from trade.