CFA Level I · CFA Level I Exam · International Trade
In one hour, Country X can produce 6 units of wheat or 3 units of cloth. In one hour, Country Y can produce 4 units of wheat or 4 units of cloth. Which statement is most accurate?
Country X has the comparative advantage in wheat. Producing one unit of wheat costs X 0.5 units of cloth, while it costs Y 1.0 unit of cloth. Y therefore has the comparative advantage in cloth, and no country can hold comparative advantage in both goods.
- ACountry X has a comparative advantage in wheatCorrect
- BCountry Y has a comparative advantage in wheat
- CCountry X has a comparative advantage in both goods
Explanation
Opportunity cost of 1 wheat: X gives up 3/6 = 0.5 cloth; Y gives up 4/4 = 1.0 cloth. X has the lower opportunity cost of wheat, so X has the comparative advantage in wheat. Y holds it in cloth (1.0 wheat versus 2.0 for X). A country cannot have a comparative advantage in both goods.
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