Assume that by devoting all of its resources to the production of X,nation Alpha can produce 40 units of X.By devoting all of its resources to the production of Y,Alpha can produce 60 units of Y.Comparable figures for nation Beta are 60 units of X and 40 units of Y.On the basis of this information,we can conclude that:
A)the terms of trade will be 3 units of X equals 1 unit of Y
B)Alpha should specialize in Y and Beta in X
C)Alpha should specialize in X and Beta in Y
D)there is no basis for mutually beneficial specialization and trade
E)the terms of trade will be 3 units of Y equals 1 unit of X

Question

Quizplus · Accepted Answer

Alpha has a comparative advantage in producing Y (since it can produce Y at a ratio of 60/40 or 1.5 Y per X, compared to Beta's 40/60 or 0.67 Y per X), and Beta has a comparative advantage in producing X (since it can produce X at a ratio of 60/40 or 1.5 X per Y, compared to Alpha's 40/60 or 0.67 X per Y). Therefore, for both countries to benefit from trade, Alpha should specialize in producing Y, and Beta should specialize in producing X.

Assume That by Devoting All of Its Resources to the Production