Table 13.6
Production and
Consumption Production
Without Trade With Trade Denmark and Belize can produce both clocks and hats.Table 13.6 shows the production and consumption quantities without trade, and the production numbers with trade.
-Refer to Table 13.6.All of the following are terms of trade that could possibly benefit both countries except
A)1 hat : 2 clocks.
B)1 hat : 4 clocks.
C)1 hat : 5 clocks.
D)1 hat : 8 clocks.

Question

Table 13.6
Production and
Consumption Production
Without Trade With Trade  Denmark and Belize can produce both clocks and hats.Table 13.6 shows the production and consumption quantities without trade, and the production numbers with trade.
-Refer to Table 13.6.All of the following are terms of trade that could possibly benefit both countries except
A)1 hat : 2 clocks. 
B)1 hat : 4 clocks. 
C)1 hat : 5 clocks. 
D)1 hat : 8 clocks.

Quizplus · Accepted Answer

The terms of trade refer to the rate at which one country can exchange its goods for another country's goods. For both countries to benefit from trade, the terms of trade must be between their opportunity costs of production. From Table 13.6, Denmark has an opportunity cost of 2 clocks per hat and Belize has an opportunity cost of 4 clocks per hat.

To benefit both countries, the terms of trade must be between 2 and 4 clocks per hat. Options A, B, and C offer advantageous terms of trade for both countries, but option D offers an exchange rate of 8 clocks per hat, which is not beneficial to Belize since they could produce 4 clocks with the same resources that it would take to produce one hat. Therefore, the answer is D.

Table 13.6 Production and