Assume that two countries (Home and Foreign) each produce two goods (corn and wheat) under constant cost production. Home produces 0.5 ton of corn or 1 ton of wheat with a day of labor. Without trade (in autarky), Home's daily production is 20 tons of wheat and 10 tons of corn. Suppose that Home completely specializes, and it consumes 20 tons of wheat after it begins trading with Foreign. Home trades with Foreign at a 1-to-1 ratio of corn for wheat. How many tons of corn does Home consume when it trades with Foreign?
A) 10 tons of corn
B) 20 tons of corn
C) 30 tons of corn
D) 40 tons of corn

Question

Quizplus · Accepted Answer

Home specializes in producing the good in which it has a comparative advantage. Given the production possibilities, Home has a comparative advantage in wheat production because it can produce 1 ton of wheat per day of labor compared to 0.5 ton of corn. If Home specializes in wheat production and produces 20 tons of wheat (its consumption level after trade), it can trade wheat for corn at a 1-to-1 ratio with Foreign. Therefore, for the 20 tons of wheat Home trades, it can consume 20 tons of corn in return.

Assume That Two Countries (Home and Foreign) Each Produce Two