CA Foundation · Business Economics · International Trade
In the absence of trade, India can exchange 1 unit of wheat for 2 units of rice domestically. In the world market, 1 unit of wheat exchanges for 3 units of rice. Based on this, which statement is correct?
India gains by exporting wheat and importing rice. Domestically one unit of wheat fetches only 2 units of rice, but the world market offers 3 units. Selling wheat abroad and buying rice there gives India more rice for each unit of wheat given up.
- AIndia gains by exporting wheat and importing riceCorrect
- BIndia gains by exporting rice and importing wheat
- CIndia gains nothing because the two ratios differ
- DIndia gains only if it imposes a tariff on wheat
Explanation
Domestically 1 wheat buys 2 rice, but abroad it buys 3 rice. Wheat is therefore relatively more valuable in the world market, so India should export wheat and import rice to get more rice per unit of wheat. Option 2 reverses the direction of trade.
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