Pls anyone explain q8 of international trade
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A country has a comparative advantage in producing a commodity if it has a lower opportunity cost as compared to another country. Consider the following example below:
Here, in order to produce 1 unit of wheat, USA has to sacrifice 0.5 units of wheat whereas for INDIA to produce 1 unit of wheat , it will have to sacrifice only 0.25 units of wheat. Clearly, India has a low opportunity cost of producing wheat and should trade Wheat for Rice i.e Export Wheat and Import Rice and terms of trade i.e opportunity cost should lie between 0.25 to 0.5
For producing 1 unit of Wheat, India will demand atleast 0.25 units of rice correct? Because that is what is India losing and USA will be ready to pay atmost i,e maximum of 0.5 units of Rice because that is what USA is losing i.e it’s opportunity cost. So, if after negotiation it is decided that the terms of trade has been decided as 0.49. It means India is getting 0.49 units of Wheat from USA . This means India has gained more than USA i,e the terms of trade is closer to the autarkic prices of the other country. Hence option C is the correct answer.