Skip to content

IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business

India can produce either 60 tonnes of cloth or 30 tonnes of steel with a given resource base, and Vietnam can produce either 40 tonnes of cloth or 10 tonnes of steel with its own resource base. Assuming constant opportunity costs, which statement is correct?

Vietnam has the comparative advantage in cloth and India in steel. India gives up 2 tonnes of cloth per tonne of steel, whereas Vietnam gives up 4. Conversely, Vietnam gives up only 0.25 tonne of steel per tonne of cloth, against India's 0.5.

  1. AIndia has a comparative advantage in cloth and Vietnam in steel
  2. BVietnam has a comparative advantage in cloth and India in steelCorrect
  3. CIndia has a comparative advantage in both goods
  4. DVietnam has a comparative advantage in both goods
  5. Neither country has a comparative advantage, so there are no gains from trade

Explanation

India's opportunity cost of 1 tonne of steel is 60/30 = 2 tonnes of cloth. Vietnam's is 40/10 = 4 tonnes of cloth. India therefore gives up less cloth to make steel and has the comparative advantage in steel. Vietnam's cloth cost per tonne is 10/40 = 0.25 steel against India's 0.5, so Vietnam holds the advantage in cloth. India's absolute advantage in both goods does not alter this.

Did you get it right without looking?

One question tells you little. A timed set on Globalisation and multinational business shows your real accuracy, how long you take and where you lose marks.

Practise Globalisation and multinational businessFree diagnostic mock

More Globalisation and multinational business questions