TutorOn by Sanath Withanage

Question:

Japan: 1 Cloth = 50 hrs, 1 Rice = 100 hrs. Thailand: 1 Cloth = 200 hrs, 1 Rice = 200 hrs. Which statement is true?
(1) Japan has comparative advantage in rice.
(2) Thailand has absolute advantage in rice.
(3) Japan has comparative advantage in cloth.
(4) Thailand has comparative advantage in cloth.
(5) Both should produce cloth.

Correct Answer:

(3)

Answer Explanation:

Calculate Opportunity Costs. In Japan, 1 Rice costs 2 Cloth ($100/50$), and 1 Cloth costs 0.5 Rice. In Thailand, 1 Rice costs 1 Cloth ($200/200$), and 1 Cloth costs 1 Rice. Thailand has a lower opportunity cost for Rice (1 < 2). Japan has a lower opportunity cost for Cloth (0.5 < 1). Therefore, Japan has the comparative advantage in Cloth.

Topic: International Trade Year: 2017