Problem #1 Canswicki: 1 can baby formula = 2 cans tuna fish Tunata: 1 can baby formula = 4 cans tuna fish Canswicki should make baby formula and import tuna fish. Tunata should make tuna fish and import baby formula. Terms of trade: Canswicki must get more than 2 cans tuna fish for each can of baby formula because that is its opportunity cost for each can of baby formula. Tunata must give up less than 4 cans of tuna fish for each can of baby formula because that is its opportunity cost for each can of baby formula. 2t < 1bf <4t 2.5 cans of tuna for 1 can of baby formula falls between these limits of trade and is beneficial to both nations.
Problem #1 Tunata: 1 can tuna fish = 1/4 can baby formula Canswicki: 1 can tuna fish = 1/2 can baby formula Tunata should make tuna fish and import baby formula. Canswicki should make baby formula and import tuna fish. Terms of trade: Tunata must get more of ¼ can of baby formula for each can of tuna fish because that is its opportunity cost for each can of tuna fish. Canswicki must give up less than 1/2 can baby formula for each can of tuna fish because that is its opportunity cost for each can of tuna fish. 1/4bf < 1t < 1/2bf 2.5 cans of tuna for 1 can of baby formula = 2/5 can of baby formula for each can of tuna. This falls between these limits of trade and is beneficial to both nations.
Problem #2 Opportunity Cost: South Korea 1 radio = 1 chemical 1 chemical = 1 radio United States 1 radio = 2 chemicals 1 chemical = ½ radio a. Yes. South Korea should produce radios. U.S. should produce chemicals. b. South Korea currently produces 24 radios and 6 chems. U.S. currently produces 4 radios and 12 chemicals. Current Total = 28 radios and 18 chemicals. With trade: South Korea produces 30 radios. U.S. produces 20 chemicals. Gain is 2 radios and 2 chemicals.
Problem #2 c. What are the limits of the terms of trade? For South Korea: 1 radio = 1 chemical S.K. is going to export radios and import chemicals. Must get more than 1 chemical for 1 radio. For the U.S.: 1 radio = 2 chemicals U.S. is going to export chemicals and import radios. Must give up less than 2 chemicals for 1 radio. (South Korean side) (U.S. Side) 1 chemical < 1 radio < 2 chemicals Is 1 radio for 1.5 chemicals beneficial to both? Yes, South Korea gets more than 1 chemical for each radio. Yes, U.S. gives up less than 2 chemicals for each radio. OR YOU COULD ALSO SOLVE IT ANOTHER WAY – SEE NEXT PAGE
Problem #2 c. What are the limits of the terms of trade? For the U.S.: 1 chemical = ½ radio U.S. is going to export chemicals and import radios. Must get more than ½ radio for each chemical. For South Korea: 1 chemical = 1 radio S.K. is going to export radios and import chemicals. Must give up less than 1 radio for each chemical. (U.S. Side) (South Korean side) ½ radio < 1 chemical < 1 radio Is 1 radio for 1.5 chemicals beneficial to both? Yes, U.S. gets 2/3 radio for each chemical. Yes, South Korea gives up 2/3 radio for each chemical.
Problem #2 c. (continued) Terms of trade: 1 radio = 1.5 chemicals 4 radios for 6 chemicals U.S. now has 14 chemicals and 4 radios (before it had 12 chemicals and 4 radios: gain 2 chemicals) South Korea now has 6 chemicals and 26 radios (before it had 6 chemicals and 24 radios: gain 2 radios) d. Yes, because these countries are now able to consume more radios and more chemicals by focusing on what they make most efficiently.