Answer to Question #227772 in Macroeconomics for Lucy

Question

Consider the case of two (2) countries, China and South Africa, both producing textiles and beer. The table below shows output rates per day in the two (2) countries, if all resources are fully and efficiently employed. 

  Textiles Beer

China 5 10

South Africa 1 6

Which of the following statements is correct?

1. There is no opportunity for mutually beneficial trade between the two (2) countries.
2. China's opportunity cost in the production of beer is lower than that of South Africa.
3. China's opportunity cost in the production of beer is higher than that of South Africa.
4. South Africa should produce textiles only and China should produce beer only and both countries should then trade with one another.

Answer 1

2.China's opportunity cost in the production of beer is lower than that of South Africa.

A comparative advantage occurs when a country can produce a good or service at a lower opportunity cost i.e in China than in South Africa leading to a lower opportunity cost in China.