Question:
The table below shows labour hours required to produce a unit of bicycles and three-wheelers in Sri Lanka and India. [India: 15/60; Sri Lanka: 20/120] Given this information, which statement is true?
(1) Sri Lanka has the absolute advantage in both products.
(2) India should specialize in bicycles and Sri Lanka should specialize in three-wheelers.
(3) India has the comparative advantage in three-wheelers.
(4) Sri Lanka has absolute advantage in three-wheelers.
(5) India has the comparative advantage in the production of both bicycles and three-wheelers.
Correct Answer:
(3)
Answer Explanation:
Calculate the opportunity cost. For India, producing 1 three-wheeler takes 60 hours, which could have produced 4 bicycles (60/15). For Sri Lanka, 1 three-wheeler takes 120 hours, which could have produced 6 bicycles (120/20). Since India gives up fewer bicycles (4 vs 6) to make a three-wheeler, India has the comparative advantage in three-wheelers.
Topic: International Trade Year: 2022
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