Assume Belgium can produce 5 units of good X or 2 units of good Y.Germany can produce 4 units of good X or 3 units of good Y.What would be the terms of trade between Belgium and Germany for 1 unit of good Y?
A)Between 4 and 5 units of X.
B)Between 4/3 and 5/2 units of X.
C)Between 4/3 and 5 units of X.
D)Between 5/2 and 4 units of X.

Question

Quizplus · Accepted Answer

Belgium has a comparative advantage in producing good X, as it can produce 2.5 times more good X than good Y (5 units of X/2 units of Y). Meanwhile, Germany has a comparative advantage in producing good Y, as it can produce 1.33 times more good Y than good X (3 units of Y/4 units of X).
To find the terms of trade, we need to find the exchange rate at which both countries are willing to trade. Belgium would not be willing to give up more than 5 units of X for 1 unit of Y (otherwise, it would be better off producing X rather than trading for Y). Likewise, Germany would not be willing to give up less than 1.33 units of Y for 1 unit of X (otherwise, it would be better off producing Y rather than trading for X). Therefore, the terms of trade must be between 4/3 and 5/2 units of X for 1 unit of Y.

Assume Belgium Can Produce 5 Units of Good X or 2