Question

Assume a Ricardian (Comparative Advantage) place. Also assume that Southland requires 8 hours for laptop computers and 2 hours for desktop computers, while the rest of the world (RoW) needs 4 hours for laptops or 2 hours for desktops. Each country has 1000 labor hrs. available. Additionally, assume these countries decide to open for trade and they specialize in products that they have comparative advantage.

What is ToT (terms of trade) for one desktop computer?

A) 0.25 < ToT < 0.5 (< signs are greater than or equal to, not < in A, B and C)

B) 2 < ToT < 4

C) 4 < ToT < 2

D) All of the above

Answer 1

Terms of trade (ToT):

This the number of goods one country must give up to obtain one unit of other good from the other country.

The limits of ToT of a good are determined by the opportunity costs of that good in both countries.

Opportunity cost of producing desktop computer in Southland is 0.25

Opportunity cost of producing desktop computer in ROW is 0.5

So, ToT for desktop computer should be

0.25 ToT 0.5

So, answer is A.