Question

1. What effect do rising costs (rather than constant costs) have on the extent of specialization and trade? Explain.

2. Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata:

Canswicki: 1 can baby formula ? 2 cans tuna fish

Tunata: 1 can baby formula ? 4 cans tuna fish

(i) In what product should each nation specialize? Justify your choice with an explanation.

(ii) Which of the following terms of trade would be acceptable to both nations: (a) 1 can baby formula ? 2 ½ cans tuna fish; (b) 1 can baby formula ? 1 can tuna fish; (c) 1 can baby formula ? 5 cans tuna fish? Please justify your choice with an adequate explanation.

Answer 1