CFA Level I · CFA Level I Exam · International Trade
In one hour, Country A can produce either 10 units of wheat or 20 units of cloth. Country B can produce either 6 units of wheat or 18 units of cloth. Based on comparative advantage, which statement is most accurate?
Country A should specialize in wheat and Country B in cloth. A gives up 2 cloth per wheat while B gives up 3, so A has the lower wheat opportunity cost. B gives up less wheat per unit of cloth, so it holds the comparative advantage in cloth.
- ACountry A should specialize in cloth and Country B in wheat
- BCountry A should specialize in wheat and Country B in clothCorrect
- CCountry A should produce both goods because it has an absolute advantage in both
Explanation
Opportunity cost of 1 wheat: A gives up 2 cloth, B gives up 3 cloth. A has the lower opportunity cost in wheat, so it has the comparative advantage in wheat. B's opportunity cost of cloth is 1/3 wheat versus A's 1/2 wheat, so B has the advantage in cloth. Option C ignores gains from specialization.
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