Hi! Can someone please elaborate a bit on the answers of Q33 parts iii and iv? How do we come to these answers/conclusions? Also, is there a standard method to tackle such questions on terms of trade? Many thanks, Angelina
Hi Angelina, Before attempting this question, I would recommend checking that you can follow the worked example on page 752 of the textbook (Economics 10th Edition). You can then apply the same method used in the textbook to lots of these questions. For part iii, you need to apply the law of comparative advantage, ie that countries should export those goods which they can produce at a lower opportunity cost than other countries, and import those goods which they produce at a higher opportunity cost than other countries. Part iv is about coming up with the ratio at which one good is exchanged for another in order for both countries to benefit. So the country that exports good X will only be better off if they can charge a higher amount in terms of good Y than their opportunity cost of producing X, and the country that exports good Y will only be better off if they can charge a higher amount in terms of good X than their opportunity cost of producing Y. Once both of these are satisfied, we end up with a range of exchange ratios at which both countries will benefit from the trade. Thanks, Richie
