If Japan has a comparative advantage over the United States in the production of new cars and can sell a new car for an average price of $22,000, while the United States can sell a new car for an average price of $25,000, if the two countries engage in trade, the terms of trade will be

Question

Quizplus · Accepted Answer

The terms of trade depend on the relative prices at which the two countries can sell their products. In this case, Japan has a comparative advantage in car production and can sell a car for $22,000, while the United States can only sell a car for $25,000. To engage in trade, both countries will want to agree on a price at which to exchange their goods. Since Japan has the comparative advantage, the terms of trade will likely be closer to Japan's price. However, the US also wants to gain from trade, so it will likely not agree to a price that is too close to Japan's price. Therefore, the terms of trade will likely fall somewhere between $22,000 and $25,000. Thus, the best choice is B.

If Japan Has a Comparative Advantage Over the United States