Question

Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both​ countries, which of the following would NOT be a potential terms of​ trade?

A. 1 auto for 3 corn

B. 1 corn for 1 auto

C. 1 corn for​ 1/3 of an auto

D. 1 auto for 4 corn

Answer 1

Answer:

B) 1 corn for 1 auto

Explanation:

A country possesses a comparative advantage in the production of a product if the opportunity cost, in terms of the amount of other products that it gives up to produce this product, is lower than it is for its trading partners.

If one nation is able to produce a good at a lower opportunity cost than another, it has a comparative advantage in that good.

For Mexico and United States, 1 corn for 1 auto would not be potential terms of trade.