MCQ for Economics June 2004 Paper 1 Question 22

[arvind0708]

22 The table shows the numbers of goods X and Y which two countries produce. Each country uses
half of its resources to make each good.
country 1 country 2
good X 100 300
good Y 200 400
Later, each country specialises in the product in which it has a comparative advantage.
Which rate of exchange would be suitable so each country gains from trade?
A 1X = 1Y
B 1X = 1.5Y
C 1X = 2Y
D 1X = 3Y

Solve this for ne

 

[Xenon]

After specialization if the exchange rate lies between the domestic opportunity cost ratios(opr), both country will gain.
The opr for 1 = 1 : 2
the opr for 2 = 1: 1.33

The exchange rate 1X=1.5Y is therefore the correct answer.