Consider two countries, India and Bangladesh, and two goods, Glass Bottle and Ceramic Plate, with labour requirements of production for a unit of each good given below:
| Glass Bottle | Ceramic Plate | |
|---|---|---|
| India | 2 hours | 3 hours |
| Bangladesh | 3 hours | 9 hours |
Which of the following options is/are correct?
Answer: (A) and (C)
Absolute advantage (lower absolute labour hours per unit):
India has an absolute advantage in both goods — this is a case where one country is more efficient at everything, which is exactly why comparative advantage (not absolute advantage) is what actually determines the pattern of beneficial trade.
Opportunity costs (comparative advantage — lower opportunity cost wins):
Bangladesh has the lower opportunity cost for Glass Bottles (0.33 < 0.67), so Bangladesh has comparative advantage in Glass Bottles, meaning India has comparative disadvantage in Glass Bottles.
Correspondingly, India's opportunity cost of 1 Ceramic Plate = Glass Bottles, versus Bangladesh's Glass Bottles — India's opportunity cost is lower, so India has comparative advantage in Ceramic Plates.
Putting it together: India has absolute advantage in Glass Bottles AND comparative disadvantage in Glass Bottles — matches (A). India also has absolute advantage in Ceramic Plates AND comparative disadvantage in Glass Bottles (equivalently, comparative advantage in Ceramic Plates) — matches (C), which correctly pairs 'absolute advantage in Ceramic Plate' with 'comparative disadvantage in Glass Bottle' (the complementary, correctly-matched statement).
(B) is incorrect because India does NOT have a comparative disadvantage in Ceramic Plate — it has a comparative advantage there. (D) is incorrect because it pairs Glass Bottle absolute advantage with Ceramic Plate comparative disadvantage, which misstates India's actual comparative disadvantage (which is in Glass Bottle, not Ceramic Plate).
Therefore the correct statements are (A) and (C).
This question is deliberately constructed with confusingly similar-sounding options that swap which good each type of advantage applies to — students who correctly compute the absolute and comparative advantages but then rush through matching them to the four verbally-similar options risk selecting a plausible-sounding but mismatched pair like (D) instead of the correctly-paired (C).
Theories of international trade has come up 151 times in 6 exams since 2006.
This question is on Absolute and comparative advantage, part of Theories of international trade in International Economics.
Why countries trade: producing more cheaply in absolute terms, or at lower opportunity cost.
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Question from the GATE 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.