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 in international trade. In this diagram, line AB represents the production possibilities curve, which shows the maximum combination of beef and cheese that can be produced domestically by Canada. Line AC represents the trading possibilities curve, which shows the maximum combination of beef and cheese that Canada can produce and trade with other countries. The absolute value of the slope of line AC represents the opportunity cost of producing beef in terms of cheese, and the reciprocal of the slope (1/slope) represents the opportunity cost of producing cheese in terms of beef. The terms of trade can lie anywhere between the absolute value of the slopes of lines AB and AC because they represent the opportunity cost of producing each good domestically and the opportunity cost of producing each good in terms of the other good for trading purposes. Therefore, the best answer is B, which is the absolute value of the slope of line AC.

Refer to the Diagram Below in Which Line AB Is