Figure 1. An Example of China-U.S. Trade Possibilities
-Considering Figure 1, what are the terms of trade represented?
A) The terms of trade are 1½ aircraft per textile.
B) The terms of trade are 1½ textiles per aircraft.
C) The terms of trade are 1 textile per aircraft.
D) The terms of trade are 2/3 textile per aircraft.

Question

Figure 1. An Example of China-U.S. Trade Possibilities 
-Considering Figure 1, what are the terms of trade represented?
A) The terms of trade are 1½ aircraft per textile. 
B) The terms of trade are 1½ textiles per aircraft. 
C) The terms of trade are 1 textile per aircraft. 
D) The terms of trade are 2/3 textile per aircraft.

Quizplus · Accepted Answer

The figure shows a production possibilities frontier for both countries, with China specializing in textile production and the US specializing in aircraft production. The terms of trade are the exchange rate between the two goods. In this case, the trade possibilities line shows that for every one aircraft that the US produces, China could produce 1.5 textiles. Therefore, the terms of trade are 1.5 textiles per aircraft, as represented by choice B.

Figure 1 an Example of China-U