Consider a world of two countries producing only wheat and cloth. In one hour, residents of Country A can produce 1 unit of wheat and 0.5 unit of cloth, whereas residents of Country B can produce 0.3 unit of wheat and 0.4 unit of cloth. Country A should export
A) wheat and cloth; country B should not export anything.
B) wheat and country B should export cloth.
C) nothing and country B should export both wheat and cloth.
D) cloth and country B should export wheat.

Question

Quizplus · Accepted Answer

According to the theory of comparative advantage, each country should specialize in and export the good that they have a lower opportunity cost of producing.

Country A has an opportunity cost of 2 units of cloth for every unit of wheat (if they produce 1 unit of wheat, they have to give up the opportunity to produce 0.5 units of cloth).

On the other hand, Country B has an opportunity cost of 1.33 units of cloth for every unit of wheat (if they produce 0.3 units of wheat, they have to give up the opportunity to produce 0.4 units of cloth).

Therefore, Country A has a comparative advantage in producing wheat, while Country B has a comparative advantage in producing cloth.

In order to maximize their gains from trade, Country A should export wheat, while Country B should export cloth. Therefore, the best choice is B.

Consider a World of Two Countries Producing Only Wheat and Cloth