Determining gains from international trade
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1.) Suppose that the United States can produce 500 million barrels of oil or 200 million pairs of tennis shoes a day. Egypt can produce 750 million barrels of oil or 300 million pairs of tennis shoes a day. If these are the only goods the countries produce, at what terms of trade would the United States and Egypt gain from trading with one another?
A) Only if Egypt can sell its oil for more than 2.5 pairs of tennis shoes per barrel will both countries gain from trade.
B) As long as the U.S. can buy oil from Egypt for less than 2.5 pairs of tennis shoes per barrel, then both Egypt and the U.S. will gain from trade.
C) As long as the U.S. can buy oil from Egypt for less than 0.4 pairs of tennis shoes per barrel, then both Egypt and the U.S. will gain from trade.
D) There are no gains to trade between Egypt and the U.S. because neither country can produce either good at a lower opportunity cost than the other country.
2.) Germany and Hungary trade with one another. Germany exports suits to Hungary, and Hungary exports clocks to Germany. The terms of trade require that Germany pay 50 suits per clock (and Hungary pays Germany 1/50 of a clock per suit). If both countries gain from trade, which of the following must be true?
A) Germany must be able to produce a suit for an opportunity cost of more than 1/50 of a clock
B) Hungary must be able to produce a clock for an opportunity cost of less than 50 suits per clock.
C) Germany must be able to produce a clock for an opportunity cost of less than 50 suits per clock.
D) Hungary must be able to produce a suit for an opportunity cost of less than 1/50 of a clock.
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Solution Summary
Two scenarios involving gains from international trade based on comparative advantage.
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1.) Suppose that the United States can produce 500 million barrels of oil or 200 million pairs of tennis shoes a day. Egypt can produce 750 million barrels of oil or 300 million pairs of tennis shoes a day. If these are the only goods the countries produce, at what terms of trade would the United States and Egypt gain from trading with one another?
US: 500 ...
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