Author Question: Refer to above figure. Now, suppose that the relative price of A is actually not higher than ... (Read 93 times)

EY67 · **on:** Jun 30, 2018

Refer to above figure. Now, suppose that the relative price of A is actually not higher than Albania's autarkic level of 1, but quite the opposite (e.g., PA/PB = 0.5).

Would Albania still be able to gain from trade? If so, where would be its production point? Given the information in this question, where is Albania's comparative advantage?

Question 2

Suppose Mexico can produce 5 autos or 10 corn. Suppose the United States can produce 4 autos or 20 corn. If opportunity costs are constant for both countries, which of the following would NOT be a potential terms of trade?

A) 1 auto for 3 corn
B) 1 auto for 4 corn
C) 1 corn for 1/3 of an auto
D) 1 corn for 1 auto

elyse44 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Yes. As long as the world's terms of trade differed from those of Albania, that country stands to gain from international trade. In this particular case, its point of production with trade would be at point c.

Answer to Question 2

D