Table 7-6
Production and
Consumption Production
Without Trade With Trade
Estonia and Morocco can produce both swords and belts.Table 7-6 shows the production and consumption quantities without trade,and the production numbers with trade.
-Refer to Table 7-6.All of the following are terms of trade that could possibly benefit both countries except
A)2/3 of a belt : 1 sword
B)3/5 of a belt : 1 sword
C)7/10 of a belt : 1 sword
D)1/4 of a belt : 1 sword

Question

Table 7-6
Production and
Consumption Production
Without Trade With Trade
  Estonia and Morocco can produce both swords and belts.Table 7-6 shows the production and consumption quantities without trade,and the production numbers with trade.
-Refer to Table 7-6.All of the following are terms of trade that could possibly benefit both countries except
A)2/3 of a belt : 1 sword 
B)3/5 of a belt : 1 sword 
C)7/10 of a belt : 1 sword 
D)1/4 of a belt : 1 sword

Quizplus · Accepted Answer

To benefit both countries, the terms of trade should be such that both Estonia and Morocco can obtain more of both goods than they are able to produce without trade. The production possibilities frontier for both the countries is such that Estonia can produce 2 belts or 10 swords, while Morocco can produce 1 belt or 6 swords. The terms of trade that could benefit both countries should lie between the opportunity costs of the two countries. The opportunity cost of producing 1 sword for Estonia is 1/5 of a belt, while for Morocco it is 1/6 of a belt. Therefore, the terms of trade that could benefit both countries must be such that Estonia gets more than 1/5 of a belt for 1 sword and Morocco gets more than 1/6 of a belt for 1 sword. Option D, 1/4 of a belt for 1 sword does not meet this condition and is therefore not a term of trade that could benefit both countries.

Table 7-6 Production and