In one hour, a worker in Country A can produce either 4 tons of wheat or 2 bolts of cloth. A worker in Country B can produce either 3 tons of wheat or 3 bolts of cloth. Based on comparative advantage, which statement is correct?
Show answer & explanation
Answer: B
A should specialize in cloth and B in wheat, since A is the more productive country.: Reversed. A gives up 2 tons of wheat per bolt of cloth, while B gives up only 1, so B is the lower-cost cloth producer.
A should specialize in wheat and B in cloth, and both can gain from trading.: Correct. Cloth costs 2 wheat in A but 1 wheat in B, so B has the comparative advantage in cloth. Wheat costs 0.5 cloth in A but 1 cloth in B, so A has it in wheat.
A should make both goods, because it has an absolute advantage in wheat.: An absolute advantage in one good does not mean producing everything. Gains from trade depend on opportunity costs (comparative advantage).
Neither country gains from trade, because their total output per hour is equal.: Different opportunity costs, not equal totals, are what matter. Here they differ, so specialization and trade raise combined output.
Comparative advantage = lower OPPORTUNITY cost. Compute what each country gives up per unit, and specialize where that cost is lower.