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The following table displays the labor input requirements to produce identical quantities of three goods in two nations, holding all other inputs unchanged
The following table displays the labor input requirements to produce identical quantities of three goods in two nations, holding all other inputs unchanged. Use this information to answer the following questions.
| Country | Grains | Wine | Clothing |
|---|---|---|---|
| Nepal | 3 | 4 | 4 |
| India | 4 | 3 | 1 |
(A) Arrange the goods in order of Nepal's comparative advantage, from greatest advantage to lowest advantage (or disadvantage).
(B) Which good or goods could Nepal gain from exporting to India? From importing from India?
Expert Solution
(A) Nepal's comparative advantage in descending order:
1) Grains
2) Wine
3) Clothing
Considering only these 2 countries, Nepal has an absolute advantage in producing grains, because it can so at a lower labor cost than India. While Nepal needs 4 units of labor input for both wine and clothing, India needs just 1 unit to produce clothing. Hence, Nepal is relatively better at producing wine than clothing.
(B) Nepal can gain from exporting grain to India and importing wine and clothing from India.
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