Question

Assume a standard 2-country model in which resources are used to produce either wine or wool, and resources are perfectly transferable between the 2 goods. Country A's opportunity cost of 1 case of wine is 5 pounds of wool. Country B's opportunity cost of 1 case of wine is 3 pounds of wool. Which of the following statements is true if Country A and Country B decide to specialize and trade? (HINT: First determine the good in which each country will specialize.)

Answer 1

Answer:

Country A will accept a rate of trade of 1 pound of wool for 5 cases of wine

Explanation:

Based on the model provided and due to the fact that goods are transferable, country A will be willing for an wool-to-wine exchange rate of 1 pound/5 cases. Due to the opportunity costs of the two countries, country A will spend more producing wine and will definitely specialized in wool. On the other hand, country be will spend less producing wine and will specialize in wine.