Given the following constant-cost production-possibilities frontiers for Pakistan and India: Pakistan has an autarky relative price of __________; if trade begins with India, then Pakistan would produce at point __________, assuming complete specialization. A) 1 cloth:0.5 wheat ; (i.e., P_cloth/P_wheat = 0.5); A B) 1 cloth:0.5 wheat ; (i.e., P_cloth/P_wheat = 0.5); B C) 1 cloth:2 wheat ; (i.e., P_cloth/P_wheat = 2); A D) 1 cloth:2 wheat ; (i.e., P_cloth/P_wheat = 2); B

Question

Quizplus · Accepted Answer

According to the production-possibilities frontier, Pakistan's opportunity cost of producing one unit of cloth is half a unit of wheat, while India's opportunity cost of producing one unit of cloth is two units of wheat. Therefore, Pakistan has a comparative advantage in producing cloth while India has a comparative advantage in producing wheat.

The autarky relative price refers to the price ratio of cloth to wheat when a country is self-sufficient and not engaging in trade. Pakistan's autarky relative price can be calculated as the slope of its production-possibilities frontier, which is 1 cloth for every 0.5 wheat. Therefore, Pakistan's autarky relative price is 2 wheat for every 1 cloth.

If trade begins with India, Pakistan would specialize in producing cloth (since it has a comparative advantage in cloth production) and export it to India in exchange for wheat. The terms of trade would lie between the two countries' opportunity costs, that is, between 0.5 and 2 wheat for every 1 cloth.

Assuming complete specialization, Pakistan would produce at point A on its production-possibilities frontier, where it can produce 4 cloth and 2 wheat. In exchange for these 4 units of cloth, Pakistan can trade with India for 4-8 units of wheat, depending on where the terms of trade lie between 0.5 and 2 wheat for every 1 cloth.

Given the Following Constant-Cost Production-Possibilities Frontiers for Pakistan and India