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. What does this movement represent in terms of Home's terms of trade?
A) It is an improvement in Home's terms of trade.
B) It is a deterioration in Home's terms of trade.
C) There is no change in Home's terms of trade.
D) The answer cannot be determined based on the information provided.

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. What does this movement represent in terms of Home's terms of trade?
A) It is an improvement in Home's terms of trade. 
B) It is a deterioration in Home's terms of trade. 
C) There is no change in Home's terms of trade. 
D) The answer cannot be determined based on the information provided.

Quizplus · Accepted Answer

A rise in the trade price means that Home needs to give up more wheat to acquire the same amount of cloth. This results in a deterioration in Home's terms of trade.

Home Has a Comparative Advantage in Wheat, and Foreign Has