The opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in Germany. If the nations split the difference between the willingness to pay and the willingness to accept, the terms of trade are 3 wristwatches per wall clock.

Question

Quizplus · Accepted Answer

The terms of trade should be 2.5 wristwatches per wall clock, which is the average of the two opportunity costs (4 in Japan and 2 in Germany). The statement in the question implies that the terms of trade are more favorable to Japan, as they are giving up fewer wristwatches than their opportunity cost. Therefore, the statement is false.

The Opportunity Cost of 1 Wristwatch Is 4 Wall Clocks