CFA Practice Question

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CFA Practice Question

Units of output per work day:

Which of the following is true?

A. Gains from trade are greatest if both Japan and the U.S. produce both goods.
B. Joint output would be maximized if the United States specialized in producing clothing and Japan specialized in producing food.
C. Joint output would be maximized if the United States specialized in food production and Japan specialized in clothing production.
Correct Answer: B

If Japan and the U.S. specialize according to comparative advantage their joint production will be maximized. As the U.S. moves resources into clothing production and Japan moves resources into food production, the joint production of both outputs increases.

User Contributed Comments 5

User Comment
smillis How is this clear if we don't know what the exchange between food and clothing will be?
Charlie you don't need to know the exchange rate between the 2.
treakj It won't make sense if, for example, the trade is 3 clothes by 1 food. In this way, it will be irrelevant to US to produce food or to import food from Japan. But for Japan, it will make sense to sell 1 food and get 3 food or less (but more than 2). The result is, the exchange rate will be forced to move to somewhere between 3:1 and 2:1, hence the comparative advantage will exist and will make the both countries outputs increase.
Nightsurfer treakj: I think you've missed the point.
Hermalia You have to look at who has the smallest opportunity cost for each good.
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