What is yarn? 

A yarn is a single thread made from piles of threads called fibers. Fibers are thin so they can not be rendered to cloth directly. They can be both natural like jute, silk, and cotton and man-made like nylon, rayon, and polyester. For making a cloth, yarn is made by hovering the fibers. There are two processes for converting yarn into cloth- knitting and weaving.

Yarn is not cloth. Instead, the cloth is made from yarn. So it is an incorrect option. 

Therefore, the correct answer is an option (1).