CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

The following table provides the output per labor unit for a pair of countries for two products.

Output/labor unit: Country X: Country Y
Bricks (thousand): 5: 6
Cement (tons): 3.5: 5

Which of the following statements can be supported on the basis of the law of comparative advantage?
A. Country X should produce cement and country Y should produce bricks.
B. Country X should produce bricks and country Y should produce cement.
C. Country X should produce 0.70 tons of cement for every 1,000 bricks and country Y should produce 0.83 tons of cement for every 1,000 bricks.
Explanation: The law of comparative advantage says that a country should specialize in the production of a good in which it has a relatively lower opportunity cost. In this case, country X's opportunity cost of producing 1,000 bricks is 0.70 tons of cement (= 3.5/5). Country Y's cost of producing 1,000 bricks is 0.83 tons of cement (= 5/6). Given that country X has a lower opportunity cost of producing bricks, it should produce bricks and country Y should produce cement. They will both benefit from trade so long as the terms of trade are between 0.70 - 0.83 tons of cement per 1,000 bricks.

User Contributed Comments 2

User Comment
Trev186 This question is deceptive because it does not say that one country can reach that production level by only making bricks or cement. I assumed they could make both at those levels
Mheaton37 It is implied, recommend plotting it out on a graph to help visualize x (bricks) and y (cement) with two unique lines for each country. Each country must decide on production levels at any place on the straight line.
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