Answer the next question on the basis of the following production possibilities

Question

Answer the next question on the basis of the following production possibilities data for Landia and Scandia:
Landia production possibilities:
            A      B      C     D      E
Fish      8      6      4      2      0
Chips    0      4      8     12    16
Scandia production possibilities:
            A      B      C     D      E
Fish      48    36    24    12     0
Chips     0     12    24    36    48
Refer to the above data. What would be feasible terms of trade between Landia and Scandia?

Explanation / Answer

In Landia, to produce an additional 20 units of Chips one has to give up producing 2 units of fish as some resources are to be diverted from fish production to chip production. But in scandia, to produce 12 more units of chips, the country has to reduce fish production by 2 units. Clearly, Landia has comparative advantage in chip production. It will be happy to buy fish in exchange for chips if some country gives it 2 fish in exchange of less than 20 chips (ie. 10 chips for 1 fish) On the otherhand, Scadia has comparative advantage in fish production and it can produce 2 units of fish by foreging production of 12 chips. Hence it would be ready to sell 2 fish for more than 12 chips. So, for Scandia, an exchange ratio higher than 6 chips for 1 fish is attractive to buy chips by selling fish, while for Landia an exchange ratio less than 10 chips for 1 fish will make it attractive for it buy fish in exchanmge for chips. So. the feasible terms of trade would be less than 10 but more than 6 chips for 1 fish. Say exchange ratios in the range 9.9 fish per fish to 6.1 per fish are feasible range of terms of trade. Hope this helps

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