CA Foundation · Business Economics · International Trade
Under the Ricardian model, India and Japan trade two goods, and the domestic opportunity cost of 1 unit of steel is 2 units of fabric in India and 4 units of fabric in Japan. Which international exchange ratio (fabric per unit of steel) would let both countries gain from trade?
An exchange ratio of 3 fabric per unit of steel lets both gain. It lies between the domestic opportunity costs of 2 in India and 4 in Japan. India receives more fabric per steel than at home, and Japan pays less than at home.
- A1.5
- B2
- C3Correct
- D5
Explanation
Both countries gain only if the trade ratio lies strictly between the domestic opportunity costs, 2 and 4. India exports steel and needs more than 2 fabric per steel; Japan imports steel and pays less than 4. A ratio of 3 fits. A ratio of 1.5 or 5 leaves one country worse off, and 2 gives India no gain.
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