Question

Table 2.1. Output Possibilities of the U.S. and the U.K. ​      Output per Labour Hour Country Wine Cloth United States 5 bottles 20 yards United Kingdom 15 bottles 10 yards

19.           Refer to Table 2.1. If trade opens up between the United States and the United Kingdom, American firms should specialize in producing

a.             cloth.

b.             wine.

c.             both cloth and wine.

d.             neither cloth nor wine.

20.           Refer to Table 2.1. Mutually advantageous trade will occur between the United States and the United Kingdom so long as one 20 yards of cloth trades for

a.             5 bottles of wine.

b.             15 bottles of wine.

c.             30 bottles of wine.

d.             60 bottles of wine.

21.           If the international terms of trade settles at a level that is between each country's opportunity cost,

a.             there is no basis for gainful trade for either country.

b.             both countries gain from trade.

c.             only one country gains from trade.

d.             one country gains and the other country loses from trade.

Answer 1

Opportunity cost is the value of the next best alternative.

	Wine (bottles)	Cloth ( Yards)
United States	5	20
United Kingdom	15	10

Opportunity cost is the value of the next best alternative.

	Opportunity cost of wine in terms of cloth	Opportunity cost of cloth in terms of wine,
United States	20/5=4 yards.	5/20=0.25 bottle of wine.
United Kingdom	10/15=0.66 yards	15/10=1.5 bottle of wine.

United Kingdom. has comparative advantage in producing wine as its opportunity cost of producing cloth is 0.66 yards, whereas, United States has a higher opportunity cost of 4 yards.

United States has comparative advantage in producing cloth as its opportunity cost is 0.25 bottle of wine, whereas, United Kingdom has a higher opportunity cost of 1.5 bottle of wine.

19 a. cloth.

20.

The price must be greater than the opportunity cost of the seller and less than the opportunity cost of the buyer

Nation                 Wine price ( in terms of cloth)          Cloth price ( in terms of wine)         

United States                  4 yards                                              0.25 bottle of wine

United Kingdom               0.66 yards                                      1.5 bottle of wine.

Answer is a)

21. b) Both countries gain.