Figure 34-2

In Figure 34-2, if the United States and Mexico are negotiating to trade wheat for petroleum,

Question

Figure 34-2

In Figure 34-2, if the United States and Mexico are negotiating to trade wheat for petroleum,

Quizplus · Accepted Answer

The point of intersection between the PPFs of the United States and Mexico represents the maximum amount of one good that each country can produce while producing a certain amount of the other. In this case, the point of intersection is at 2 units of wheat and 3 units of petroleum. This means that the United States could produce 2 units of wheat and 3 units of petroleum, or any combination along its PPF, and Mexico could produce 2 units of wheat and 3 units of petroleum, or any combination along its PPF.

If the United States and Mexico decide to trade, they will produce at the point of intersection and specialize in the good that they have a comparative advantage in. In this case, if the United States specializes in wheat and Mexico specializes in petroleum, they will end up with a total production of 4 units of wheat and 4 units of petroleum, which is more than what they would have without trade.

The terms of trade—the rate at which they exchange goods—must lie between the opportunity costs of the two countries. For the United States, the opportunity cost of producing one unit of wheat is 2 units of petroleum (the slope of its PPF at the point of intersection). For Mexico, the opportunity cost of producing one unit of wheat is 1/2 unit of petroleum (the reciprocal of the slope of its PPF at the point of intersection). Therefore, the terms of trade must lie between 1 unit of wheat for 2/3 units of petroleum for the United States and 1 unit of wheat for 1 1/2 units of petroleum for Mexico, which is closest to option C.

Figure 34-2 In Figure 34-2, If the United States and Mexico Are