Refer to the diagram below in which line AB is Canadian production possibility curve and AC is its trading possibilities curve.The international exchange ratio between beef and cheese (terms of trade):

Question

Quizplus · Accepted Answer

The terms of trade refer to the exchange ratio between two goods when countries engage in international trade. It is determined by the ratio of the price of exports to imports. In this case, line AC represents the trading possibilities curve, which shows the combinations of beef and cheese that Canada can trade with other countries. The absolute value of the slope of line AC represents the opportunity cost of producing one unit of beef in terms of cheese that Canada gives up when it chooses to specialize in beef production and trade. This is equivalent to the price of beef in terms of cheese on the international market, which is the terms of trade. Therefore, B is the correct answer.

Refer to the Diagram Below in Which Line AB Is