Question

2. The table below shows output of cotton and jute per labor-hour in India and Nepal
respectively. Based on this example, indicate comparative advantage and disadvantage for
both countries. Also illustrate the gains from trade to India and Nepal if they exchange 6
units of cotton for 6 units of jute.

Table: Cost differences in terms of output per labor-hour
Country Output per labor-hour
Unit of cotton Unit of jute
India 6 3
Nepal 1 2

Answer 1

	Output per labor - hour
Country	Units of cotton	Units of Jute
India	6	3
Nepal	1	2

Country	Opportunity cost of producing cotton in terms of jute	Opportunity cost of producing jute in terms of cotton
India	(3/6) = 0.5 jute per cotton	(6/3) = 2 cotton per jute
Nepal	(2/1) = 2 jute per cotton	(1/2) = 0.5 cotton per jute

India's opportunity cost of producing cotton in terms of jute is lower than Nepal's opportunity cost of producing cotton in terms of jute. It means India has comparative advantage in producing Cotton, whereas Nepal has comparative disadvantage in producing Cotton.

Nepal's opportunity cost of producing jute in terms of cotton is lower than India's opportunity cost of producing jute in terms of cotton . It means Nepal has comparative advantage in producing Jute, whereas India has comparative disadvantage in producing Jute.

Note: Total number of labor hour available in both countries is required to calculate gains from trade.