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CA Foundation · Business Economics · International Trade

In India, 1 unit of labour produces 10 kg of rice or 20 metres of cloth. In Bangladesh, 1 unit of labour produces 6 kg of rice or 18 metres of cloth. Which statement is correct about comparative advantage?

India has the comparative advantage in rice and Bangladesh in cloth. India gives up 2 metres of cloth per kg of rice, while Bangladesh gives up 3 metres. Bangladesh therefore sacrifices less rice per metre of cloth, even though India is absolutely more productive in both goods.

  1. AIndia has a comparative advantage in cloth and Bangladesh in rice
  2. BIndia has a comparative advantage in rice and Bangladesh in clothCorrect
  3. CIndia has a comparative advantage in both goods
  4. DBangladesh has a comparative advantage in both goods

Explanation

India's opportunity cost of 1 kg rice is 2 m cloth; Bangladesh's is 3 m cloth. So India is the lower-cost producer of rice. India's cost of 1 m cloth is 0.5 kg rice, while Bangladesh's is 0.33 kg rice, so Bangladesh has the advantage in cloth. India has absolute advantage in both, but that does not give it comparative advantage in both.

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