Question

The chart below shows the number of resource units the countries Gamma and Omega must use to produce one unit of food or one unit of clothing.

The figure shows a table with three columns and two rows of data. The first column lists Food, Clothing. The second column is labeled Gamma and the third column is labeled Omega. Row one lists Food, Gamma - 10 resource units; Omega - 5 resource units. Row two lists Clothing, Gamma - 9 resource units; Omega - 3 resource units.

Which of the following statements is true according to the chart above?


Trade should take place, with Gamma specializing in clothing production and Omega specializing in food production.


a

Trade should take place, with Gamma specializing in food production and Omega specializing in clothing production.


b

Each country should devote half of its resources to food production and half to clothing production and not trade.


c

Since Omega can produce both food and clothing using fewer resources than Gamma, it cannot benefit from trade with Gamma


d

Since Gamma can produce both food and clothing using fewer resources than Omega, it cannot benefit trade with Omega.

Answer 1

Answer: b

Reason: Compare opportunity costs. For Gamma, 1 food costs 10 resources = 10/9 clothing, while for Omega 1 food costs 5 resources = 5/3 clothing. Gamma has the lower opportunity cost of food, so Gamma has comparative advantage in food. For clothing, Gamma's opportunity cost is 9/10 food = 0.9 food, Omega's is 3/5 food = 0.6 food, so Omega has comparative advantage in clothing. Thus trade is beneficial with Gamma specializing in food and Omega in clothing.