Skip to content

IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business

Country X can produce either 20 units of cloth or 10 units of software per worker-day. Country Y can produce either 12 units of cloth or 8 units of software per worker-day. Which statement about the gains from specialisation and trade is correct?

X has a comparative advantage in cloth, since its opportunity cost of cloth is 0.5 software against Y's 0.67, while Y has it in software. Both countries can gain if X specialises in cloth and Y in software, despite X's absolute advantage in both.

  1. AX has a comparative advantage in software because it has an absolute advantage in both goods
  2. BY has a comparative advantage in cloth because its opportunity cost of cloth is lower
  3. CNo mutually beneficial trade is possible because X has an absolute advantage in both goods
  4. DX has a comparative advantage in cloth, and trade can benefit both countries if X specialises in cloth and Y in softwareCorrect
  5. Y has an absolute advantage in software

Explanation

Opportunity cost of 1 software: X gives up 2 cloth, Y gives up 1.5 cloth. So Y has the lower opportunity cost in software (comparative advantage), X in cloth (cost of cloth in X is 0.5 software versus 0.667 in Y). Mutually beneficial trade follows if X specialises in cloth and Y in software. Absolute advantage in both goods by X does not prevent gains.

Did you get it right without looking?

One question tells you little. A timed set on Globalisation and multinational business shows your real accuracy, how long you take and where you lose marks.

Practise Globalisation and multinational businessFree diagnostic mock

More Globalisation and multinational business questions