CA Foundation · Business Economics · International Trade
In one hour of labour, India can produce either 8 units of wheat or 4 units of cloth. In one hour, Nepal can produce either 3 units of wheat or 2 units of cloth. Which statement is correct?
India has a comparative advantage in wheat and Nepal in cloth. India gives up 2 wheat per cloth while Nepal gives up only 1.5 wheat, so Nepal has the lower opportunity cost in cloth. India therefore should specialise in wheat even though it is more productive in both.
- AIndia has a comparative advantage in cloth and Nepal in wheat
- BIndia has a comparative advantage in wheat and Nepal in clothCorrect
- CIndia has a comparative advantage in both goods
- DNepal has an absolute advantage in cloth
Explanation
India's opportunity cost of 1 cloth is 8/4 = 2 wheat; Nepal's is 3/2 = 1.5 wheat. So Nepal has the lower opportunity cost in cloth, and India has it in wheat (0.5 cloth per wheat versus Nepal's 0.667). India has absolute advantage in both, so option D is wrong, and option A reverses the result.
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