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August 27, 2014

Homework Help: Econ question trade part 2

Posted by tofu on Monday, February 12, 2007 at 1:32pm.

i posted this question yesterday. but i also got another questions

This is the chart

Canada produces 50 wheat and 20 Microchips
Jpn produces 2 wheat and 12 Microships

the original question was

1. If the terms of trade changed to 2 microships for one tonne of wheat, which country would benefit


ok so i calculated all the opportunity costs
for canada,
1 wheat = 0.4 microchip
1 microchip = 2.5 wheat

for jpn
1 micro = 2/12 of wheat
1 wheat = 6 microchip

so in this case, canada specilizes in wheat and japan in microchips

so now to answer the question, i think japan would benefit the most because originally, japan would only get 2/12 of a wheat for one micro, but now they would get 2 microchips for one.....is that my reasoning correct???

Question 2.
Between what given range can these 2 countires agree to trade microchips for wheat.

i know it has to something about the range, but im not sure which one

I think your reasoning is on the right track. Without trade, japan gets 2/12 units of wheat for each chip. With trade they get 1/2 wheat for each chip (or 1 wheat for each 2 chips).

That said, I would be reluctant to say that japan benefits more than canada. Both countries benefit (in the case of canada before trade, they get .4 chip for each wheat).

2) Countries will trade if the terms of trade are better than not trading. So Canada will sell wheat for chips as long as it gets more than .4 chips for each wheat. Japan will buy wheat as long as it pays less than 6 chips for each wheat. So the final price for 1 wheat will be between .4 and 6 chips. Repeat this process for determining the price of chips in terms of wheat.

so for 2...the two countries will trade microchips for wheat as long as the final price for micro is between 2.5 and 2/12

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