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?

Question

Quizplus · Accepted Answer

Belgium has a comparative advantage in producing good X, as it can produce more units of X compared to Y. Germany, on the other hand, has a comparative advantage in producing good Y, as it can produce more units of Y compared to X.

To determine the terms of trade, we need to find an exchange rate that both countries are willing to accept.

Belgium would not want to trade 1 unit of Y for anything less than 5 units of X, as it can produce 5 units of X on its own. Germany, on the other hand, would not want to trade 1 unit of Y for anything less than 2/3 units of X, as it can produce 3 units of Y on its own, which is equivalent to 4/3 units of X based on the production possibilities.

Therefore, the terms of trade would fall between 4/3 and 5/2 units of X per unit of Y, which is answer B.

Assume Belgium Can Produce 5 Units of Good X or 2