e Page(s) 590-592 19.2. How Does International Trade Help the Economy? Suppose M

Question

e Page(s) 590-592 19.2. How Does International Trade Help the Economy? Suppose Mexico's opportunity cost for producing 1 unit of food is 3 units of clothing and the United States' opportunity cost for producing 1 unit of food is 0.5 units of clothing. Trade at a ratio of 1:1 is beneficial to both countries. How beneficial would it be for Mexico if the trading ratio were 1 unit of clothing for every 2 units of food? Click or tap a choice to answer the question. Mexico is better off not trading at all. It is still beneficial, but not as good as 1:1. This is even better than 1:1. So long as the ratio is between 1:3 and 2:1, it makes no difference.

Explanation / Answer

The opportunity cost of producing food is lower in the US than that of Mexico. So the US will specialize and produce food and Mexico will produce cloth.

When the trade ratio was 1:1 that is Mexico has to export 1 unit of cloth and can import 1 unit of food.

when the trade ratio is 1 unit of clothing for every 2 unit of food, Mexico export 1 unit of cloth and can import 2 unit of food.

So Mexico gains more by the later trade ratio.

So the option 'This is even better than 1:1' is correct.

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