Assume Saudi Arabia can produce 4 units of good X or 3 units of good Y.Tunisia can produce 5 units of good X or 8 units of good Y.What would be the terms of trade between Saudi Arabia and Tunisia for 1 unit of good Y?
A)Between 3/4 and 8/5 units of X.
B)Between 3 and 5 units of X.
C)Between 4 and 8 units of X.
D)Between 5/8 and 4/3 units of X.

Question

Quizplus · Accepted Answer

To determine the terms of trade, we need to find the opportunity cost of producing 1 unit of good Y for each country. 
In Saudi Arabia, the opportunity cost of producing 1 unit of good Y is 4/3 units of good X (since they can produce 4 units of X for every 3 units of Y). 
In Tunisia, the opportunity cost of producing 1 unit of good Y is 5/8 units of good X (since they can produce 5 units of X for every 8 units of Y). 
Therefore, the terms of trade for 1 unit of good Y would be between 5/8 and 4/3 units of good X.

Assume Saudi Arabia Can Produce 4 Units of Good X