CA Foundation · Business Economics · International Trade
In one day of labour, Country X can produce either 10 units of wheat or 20 units of cloth. Country Y can produce either 4 units of wheat or 12 units of cloth. Which statement is correct?
Country X has a comparative advantage in wheat and Y in cloth. X sacrifices 2 cloth per wheat while Y sacrifices 3 cloth, so X is the lower-cost wheat producer. Y sacrifices only 1/3 wheat per cloth against X's 1/2, so Y is better at cloth.
- AX has a comparative advantage in cloth and Y in wheat
- BX has a comparative advantage in wheat and Y in clothCorrect
- CX has a comparative advantage in both goods
- DY has a comparative advantage in wheat
Explanation
Opportunity cost of 1 wheat: X = 20/10 = 2 cloth; Y = 12/4 = 3 cloth. X gives up less cloth for wheat, so X has comparative advantage in wheat. Opportunity cost of 1 cloth: X = 0.5 wheat; Y = 0.33 wheat, so Y has comparative advantage in cloth. Option 1 reverses this.
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