The goods can be produced by two countries with given resources are as follows: Wine Bread A 10 20 B 4 16 (i) Which country should specialize in the production of bread? (ii) Calculate the global production of bread and wine by both countries after complete specialization. (iii) Select an appropriate terms of trade of units of bread for units of wine and demonstrate why both countries can be better off after specialization and exchange. I got the answer to part(i) and (ii). (i) country B (ii) Country A would produce 20 units of wine and Country B would produce 32 units of bread. Could anyone please help with part(iii)? Thanks
Hi Bharti Just seen this - it's comparative advantage and terms of trade again, so similar to the other question you asked about in the other thread. Since you've got to part (iii), you've already worked out that both countries can benefit from specialisation, in that they can produce one good and import the other for less than the opportunity costs of production. Part (iii) is asking you to find a price for a unit of bread in terms of a unit of wine whereby both countries will be better off than if they produced both goods themselves, and did not trade. Try putting some prices in and see what the effect is. You will likely find that one of the countries will benefit enormously at first, but with a bit of work you should be able to home in on a price that is beneficial for both countries (which will complete the question). Once you've done this you should be able to see how to work out the range of possible trading prices directly.
