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Difficulty: MediumTheories of International Trade (Absolute and Comparative Advantage)

The table below shows the output of Cocoa and Textiles produced per unit of labor in Country X and Country Y:

CountryCocoa (tons)Textiles (meters)
Country X1020
Country Y618

Based on the law of comparative advantage, which of the following specialization decisions is mutually beneficial for both countries?

  1. Country X should specialize in Cocoa, while Country Y should specialize in Textiles.Answer
  2. B
    Country X should specialize in both commodities because it holds an absolute advantage in both.
  3. C
    Country Y should specialize in Cocoa because its opportunity cost of producing Cocoa is lower than Country X's.
  4. D
    Country X should specialize in Textiles because the monetary price of Textiles is lower in Country X.

Answer

Country X should specialize in Cocoa, while Country Y should specialize in Textiles.
To maximize international gains from trade, countries specialize according to comparative advantage (lowest opportunity cost). Country X sacrifices only 2 meters of Textiles per ton of Cocoa, compared to Country Y's sacrifice of 3 meters. Thus, Country X has a comparative advantage in Cocoa. Conversely, Country Y sacrifices only 0.33 tons of Cocoa per meter of Textiles, compared to Country X's 0.5 tons, giving Country Y a comparative advantage in Textiles.

Step-by-Step Solution

1
Calculate the opportunity cost of producing 1 unit of Cocoa for each country.
Country X: 10 tons Cocoa = 20 meters Textiles → 1 ton Cocoa costs 20/10=220 / 10 = 2 meters Textiles.
Country Y: 6 tons Cocoa = 18 meters Textiles → 1 ton Cocoa costs 18/6=318 / 6 = 3 meters Textiles.
Lower opportunity cost indicates comparative advantage in Cocoa production.
2
Calculate the opportunity cost of producing 1 unit of Textiles for each country.
Country X: 20 meters Textiles = 10 tons Cocoa → 1 meter Textile costs 10/20=0.510 / 20 = 0.5 tons Cocoa.
Country Y: 18 meters Textiles = 6 tons Cocoa → 1 meter Textile costs 6/18=0.336 / 18 = 0.33 tons Cocoa.
Lower opportunity cost indicates comparative advantage in Textile production.
3
Determine specialization based on comparative advantage.
Country X has a lower opportunity cost for Cocoa (2<32 < 3) and should specialize in Cocoa. Country Y has a lower opportunity cost for Textiles (0.33<0.50.33 < 0.5) and should specialize in Textiles.
Both nations gain when each specializes in the commodity in which it holds a comparative advantage.

Key Concept

Theory of Comparative Advantage (Opportunity Cost Principle)
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Topics

Theories of International Trade (Absolute and Comparative Advantage)

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