Question

5. Suppose that the comparative-cost ratios of two products-mangoes and sardines-are as follows in the hypothetical nations of Mangolia and Sardinia. Mangolia: 1mango = 2 cans of sardines Sardinia: 1 mango = 4 cans of sardines In what product should each nation specialize Explain why the terms of trade of 1 mango = 3 cans of sardines would be acceptable to both nations.

Answer 1

In Mongolia

1 mango = 2 cans of sardines

1 sardines = 1/2=0.5 mango

In Sardinia

1 mango = 4 cans of sardines

1 sardines = 1/4=0.25 mango

Because Mongolia has a comparative advantage in the production of Mangoes and Sardinia has a comparative advantage in the production of Sardines So, Mongolia would specialize in the production of Mangoes and Sardinia would specialize in the production of Sardines

1 mango = 3 sardines is above the opportunity cost of a Mango in Mongolia so it would be willing to trade similarly for Sardinia 1 can of sardines = 1/3= 0.3 mango which is above its opportunity cost so it would be willing to trade at this terms of trade.