Assume that two countries (Home and Foreign) each produce two goods
(corn and wheat) under constant cost production.Home produces 0.5
Ton of corn or a ton of wheat with a day of labor.Without trade (in
Autarky), Home's daily production is 20 tons of wheat and 10 tons of
Corn.Suppose that, after trade occurs, the international price actually
Becomes 1.5 tons of wheat per ton of corn.Which of the following
Statements is TRUE?
A)Home will gain from trade but Foreign will not.
B)Foreign will gain from trade but Home will not.
C)Neither home nor Foreign will gain from trade.
D)Both Home and Foreign will gain from trade.

Question

Quizplus · Accepted Answer

Before trade, Home produces 20 tons of wheat and 10 tons of corn using a day of labor. If it specializes solely in wheat and trades with Foreign based on the international price ratio, it can trade 10 tons of wheat for (10/1.5) = 6.67 tons of corn, which increased their total amount of corn they owned. At the same time, Foreign can specialize in corn and trade (10/0.5) = 20 tons of corn for (20 x 1.5) = 30 tons of wheat. Thus, both countries gain from trade as they obtain more of the good they are relatively better at producing.

Assume That Two Countries (Home and Foreign) Each Produce Two