CA Foundation · Business Economics · International Trade
In one day of work, India can produce either 40 units of software services or 20 units of textiles. The UK can produce either 30 units of software services or 10 units of textiles. Both countries gain from trade only if the price of 1 unit of textiles in terms of software services lies between:
The price of one textile unit must lie between 2 and 3 units of software. India's opportunity cost is 2 software per textile and the UK's is 3. India gains only above 2 and the UK gains only below 3, so mutually beneficial terms of trade fall in that range.
- A2 and 3 units of softwareCorrect
- B0.5 and 0.33 units of software
- C1 and 2 units of software
- D3 and 4 units of software
Explanation
India's opportunity cost of 1 textile = 40/20 = 2 software. UK's opportunity cost of 1 textile = 30/10 = 3 software. India has the comparative advantage in textiles and will export them. India will accept any price above 2 and the UK will pay any price below 3. So the terms of trade must lie between 2 and 3 software units per textile. Options 2 and 3 use the wrong ratios or are outside the range.
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