Home has a comparative advantage in wheat, and Foreign has a comparative advantage in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign produces 1,000 yards of cloth. The following table shows the amount of wheat that Home is willing to trade to acquire more cloth. Suppose that Home's trade price rose from 0.5 bushel of wheat per yard of cloth in 2009 to a bushel of wheat per yard of cloth in 2010. Which of the following statements is true?
A) Home's situation had greatly improved in 2010.
B) Home's situation had deteriorated in 2010.
C) Home's situation was the same as it was in 2009.
D) Home's situation had slightly improved in 2010.

Question

Home has a comparative advantage in wheat, and Foreign has a comparative advantage in cloth. Once trade occurs, Home produces 1,500 bushels of wheat, and Foreign produces 1,000 yards of cloth. The following table shows the amount of wheat that Home is willing to trade to acquire more cloth.  Suppose that Home's trade price rose from 0.5 bushel of wheat per yard of cloth in 2009 to a bushel of wheat per yard of cloth in 2010. Which of the following statements is true?
A) Home's situation had greatly improved in 2010. 
B) Home's situation had deteriorated in 2010. 
C) Home's situation was the same as it was in 2009. 
D) Home's situation had slightly improved in 2010.

Quizplus · Accepted Answer

An increase in trade price means that Home needs to give up more bushels of wheat to acquire the same amount of cloth. This implies that it is now more expensive for Home to obtain cloth, which translates to a deterioration in their situation.

Home Has a Comparative Advantage in Wheat, and Foreign Has