Question:
In country A, 1 unit of cloth = 5 labour hours; 1 unit of rice = 10 labour hours. In country B, 1 unit of cloth = 7 labour hours; 1 unit of rice = 21 labour hours. At what exchange rate would country A be willing to trade with country B?
(1) More than 2 units of cloth per unit of rice
(2) More than 2 units of rice per unit of cloth
(3) More than 3 units of cloth per unit of rice
(4) More than 3 units of rice per unit of cloth
(5) More than 0.5 units of rice per unit of cloth
Correct Answer:
(1)
Answer Explanation:
Country A’s internal opportunity cost for 1 unit of Rice is 2 units of Cloth (10 hrs / 5 hrs). Country B’s internal cost for 1 Rice is 3 Cloth (21 hrs / 7 hrs). Because A sacrifices only 2 Cloth to make Rice, it has the comparative advantage in Rice. For A to benefit from exporting Rice, it must receive a price higher than its internal cost. Thus, A will trade if it gets more than 2 units of cloth per unit of rice.
Topic: International Trade Year: 2020
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