Based on the information in Table 35.1, assume China and the United States have the same amount of resources with which to produce soybeans and computers and they produce no other goods. For trade to be mutually beneficial for both countries, the terms of trade will be such that 1 computer will exchange for
A) More than 3 tons of soybeans but less than 5.
B) More than 1/5 of a ton of soybeans but less than 1/3.
C) Less than 1/5 of a ton of soybeans.
D) Zero soybeans.

Question

Based on the information in Table 35.1, assume China and the United States have the same amount of resources with which to produce soybeans and computers and they produce no other goods. For trade to be mutually beneficial for both countries, the terms of trade will be such that 1 computer will exchange for
A) More than 3 tons of soybeans but less than 5. 
B) More than 1/5 of a ton of soybeans but less than 1/3. 
C) Less than 1/5 of a ton of soybeans. 
D) Zero soybeans.

Quizplus · Accepted Answer

According to Table 35.1, China can produce 4 tons of soybeans or 1 computer with one unit of resources (presumably labor or capital). Similarly, the United States can produce 2 tons of soybeans or 1 computer with one unit of resources.

For trade to be mutually beneficial, each country should specialize in the production of the good in which they have a comparative advantage (i.e. they can produce at a lower opportunity cost).

Assume that China specializes in producing soybeans and the United States specializes in producing computers. China could produce 8 tons of soybeans (2 units of resources x 4 tons) and the United States could produce 2 computers (2 units of resources x 1 computer).

Now, the terms of trade (the exchange rate between soybeans and computers) would need to be such that both countries are willing to trade. Let's assume that the terms of trade are such that one computer trades for X tons of soybeans.

China should only trade if they can get more soybeans by trading than they could produce on their own. In other words, they would only trade if X > 4 (the amount of soybeans they could produce with one unit of resources). Similarly, the United States should only trade if they can get more computers by trading than they could produce on their own. They would only trade if X < 1 (the amount of computers they could produce with one unit of resources).

Therefore, the terms of trade must be such that:

1 computer trades for more than 1/4 ton of soybeans but less than 1 ton of soybeans.

Simplifying, we get:

1 computer trades for more than 1/4 but less than 1 ton of soybeans.

The only choice that fits this description is B.

Based on the Information in Table 35