Question:
The diagram shows production possibility curves for two countries, A and B… According to the theory of comparative advantage,
(1) both countries can benefit by specialisation.
(2) country B has a higher opportunity cost than country A in producing cinnamon.
(3) country A has a higher opportunity cost than country B in producing cinnamon.
(4) country B exports cinnamon to country A.
(5) trade between country A and country B cannot take place.
Correct Answer:
(5)
Answer Explanation:
If two countries have parallel linear Production Possibility Curves, their domestic opportunity costs are identical. The theory of comparative advantage states that mutually beneficial trade requires a difference in opportunity costs. Without this difference, no comparative advantage exists, and trade cannot take place.
Topic: International Trade Year: 2021
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