International Trade, Exchange Rates, Balance of Payments and Development Issues Practice Questions | University Admission Economics

University Admission Economics Exam

Question 1 of 30

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Two countries, R and S, each use one unit of labour to produce outputs as follows: In R, 1 labour produces \(4\) units of wheat or \(2\) units of cloth; in S, 1 labour produces \(3\) units of wheat or \(3\) units of cloth. If both specialise fully according to comparative advantage and then trade, which statement is correct?

Select one option.

R has absolute advantage in both goods, so S cannot gain from trade
R should specialise in cloth because its cloth output is higher than S in cloth
R has comparative advantage in wheat, S has comparative advantage in cloth, so trade can create gains for both
S has comparative advantage in wheat because it produces wheat and cloth equally
There can be gains only if both countries have absolute advantage in at least one good

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