Scenario 20.2 Suppose labor productivity differences are the only determinants of comparative advantage,and both Egypt and produce only corn and cocoa.In Egypt,10 bushels of corn or 15 pounds of cocoa can be produced in a day.In Ghana,one day of labor can be used to produce either 2 bushels of corn or 8 pounds of cocoa.
-Based on Scenario 20.2,which of the following terms of trade would benefit both countries?

Question

Quizplus · Accepted Answer

The opportunity cost of producing one pound of cocoa in Egypt is 2/3 bushels of corn (10/15), while the opportunity cost of producing one pound of cocoa in Ghana is 0.25 bushels of corn (2/8). Therefore, Ghana has a comparative advantage in producing cocoa, while Egypt has a comparative advantage in producing corn. To benefit both countries, the terms of trade should lie between the opportunity cost ratios of the two countries, which is 0.25/2/3 = 0.375 bushels of corn per pound of cocoa for Egypt, and 1 pound of cocoa per 0.25 bushels of corn for Ghana. The only choice that falls within this range is D, where 1 pound of cocoa is equal to 0.5 bushels of corn.