Refer to the information provided in Table 18.2 below to answer the questions that follow.
Table 18.2
-Refer to Table 18.2. Which terms of trade benefits both countries?
A) 1 tractor for 10 motorcycles
B) 1 tractor for 12.5 motorcycles
C) 1 motorcycle for 10 tractors
D) 1 motorcycle for 1/5 of a tractor

Question

Refer to the information provided in Table 18.2 below to answer the questions that follow.
Table 18.2 
-Refer to Table 18.2. Which terms of trade benefits both countries?
A) 1 tractor for 10 motorcycles 
B) 1 tractor for 12.5 motorcycles 
C) 1 motorcycle for 10 tractors 
D) 1 motorcycle for 1/5 of a tractor

Quizplus · Accepted Answer

Trade between countries benefits both parties if they are able to exchange goods at a rate that is mutually beneficial. In this case, Country B has a comparative advantage in producing motorcycles (it can produce 1 motorcycle with only 1/2 a tractor) while Country A has a comparative advantage in producing tractors (it can produce 1 tractor with only 5 motorcycles). Based on the terms of trade provided in Table 18.2, option B (1 tractor for 12.5 motorcycles) is the only trade that benefits both countries. Country A is willing to trade 1 tractor for 10 motorcycles, but Country B is able to produce 12.5 motorcycles with a tractor, so it can receive 1 tractor and benefit from the trade. Conversely, Country B is willing to trade 1 motorcycle for 1/5 of a tractor, but Country A would have to give up 5 motorcycles to receive 1 tractor, so it would not benefit from the trade. Option A (1 tractor for 10 motorcycles) only benefits Country B, while option C (1 motorcycle for 10 tractors) only benefits Country A, and option D (1 motorcycle for 1/5 of a tractor) only benefits Country B.

Refer to the Information Provided in Table 18