The limits of the terms of trade between two countries are determined by those countries' opportunity costs of production.

Question

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The opportunity cost of production is the cost of producing one good in terms of the production of another good that must be given up. Therefore, the countries will specialize in the production of the good with the lowest opportunity cost and trade with countries that have a higher opportunity cost of producing that same good. This results in mutually beneficial trade, and the terms of trade will be determined by the opportunity costs of the countries involved.

The Limits of the Terms of Trade Between Two Countries