Suppose that trade occurs. Each country completely specializes and 500 kegs of beer are traded for 500 bottles of whiskey. What is the international price of beer?
A)1 bottle of whiskey = 1 keg of beer
B)3 bottles of whiskey = 1 keg of beer
C)2/3 bottle of whiskey = 1 keg of beer
D)1 bottle of whiskey = 3 kegs of beer

Question

Quizplus · Accepted Answer

Since each country completely specializes, the domestic opportunity cost of producing beer and whiskey is infinite. Thus, the exchange ratio should be determined by the international relative supply of beer and whiskey. Since both countries produce equal amounts of beer and whiskey, the international relative supply of beer and whiskey is also equal. Therefore, the exchange ratio should be one-to-one, or 1 bottle of whiskey for 1 keg of beer.

Suppose That Trade Occurs