Refer to the information provided in Table 33.2 below to answer the question(s) that follow.
Table 33.2
-Refer to Table 33.2. Which terms of trade benefits both countries?
A) 1 tractor for 10 motorcycles
B) 1 tractor for 12.5 motorcycles
C) 1 motorcycle for 10 tractors
D) 1 motorcycle for 1/5 of a tractor

Question

Refer to the information provided in Table 33.2 below to answer the question(s) that follow.
Table 33.2 
-Refer to Table 33.2. Which terms of trade benefits both countries?
A) 1 tractor for 10 motorcycles 
B) 1 tractor for 12.5 motorcycles 
C) 1 motorcycle for 10 tractors 
D) 1 motorcycle for 1/5 of a tractor

Quizplus · Accepted Answer

The terms of trade that benefits both countries is when the opportunity cost for each country is lower than the terms of trade. In this case, Country X has an opportunity cost of 1 tractor for 8 motorcycles (the lesser amount of motorcycles they could produce with the resources used to produce 1 tractor). Country Y has an opportunity cost of 1 tractor for 16 motorcycles (the lesser amount of motorcycles they could produce with the resources used to produce 1 tractor). The terms of trade that benefits both countries is when the exchange rate is between these opportunity costs. Therefore, the exchange rate of 1 tractor for 12.5 motorcycles benefits both countries (it is between 8 and 16).

Refer to the Information Provided in Table 33