One worker in Country X can produce either 20 units of cloth or 10 units of wheat per day. One worker in Country Y can produce either 12 units of cloth or 8 units of wheat per day. According to the theory of comparative advantage:

Correct answer: B) Country X should specialise in cloth and Country Y in wheat

Explanation

Opportunity cost of 1 wheat: X = 20 / 10 = 2 cloth; Y = 12 / 8 = 1.5 cloth. Y has the lower opportunity cost of wheat. Opportunity cost of 1 cloth: X = 10 / 20 = 0.5 wheat; Y = 8 / 12 = 0.67 wheat, so X has the comparative advantage in cloth. Gains from trade exist even though X has an absolute advantage in both goods.