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Chapter 20: Q6. (page 430)

Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡ 1W in Switzerland but 1C ≡ 4W in Japan. At which of the following international exchange ratios (terms of trade) will Switzerland and Japan be willing to specialize and engage in trade with each other? Select one or more answers from the choices shown.

  1. 1C ≡ 3W

  2. 1C≡1/2W

  3. 1C ≡ 5W

  4. 1/2C≡1W

  5. 2C ≡ 1W

Short Answer

Expert verified

The correct options are: a) 1C ≡ 3W, and d) 1/2C≡1W

Step by step solution

01

Step 1. Explanation

The terms of trade represent the ratio of export price and import price. The terms of trade should be between the opportunity costs of the two countries. For Switzerland, 1 cheese needs to be given for 1 watch; thus, it will be better off if ½ cheeses need to be given for 1 watch. For Japan, 4 watches need to be given for 1 cheese; thus, it will be better off by giving 3 watches for 1 cheese. Hence, 1C ≡ 3W, and 1/2C≡1W is between 1C ≡ 1W and 1C ≡ 4W.

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Most popular questions from this chapter

The accompanying hypothetical production possibilities tables are for New Zealand and Spain. Each country can produce apples and plums. Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following:

New Zealand’s Production Possibilities Table (Millions of Bushels)


Production Alternatives

Product

A

B

C

D

Apples

0

20

40

60

Plums

15

10

5

0


Spain’s Production Possibilities Table (Millions of Bushels)


Production Alternatives

Product

R

S

T

U

Apples

0

20

40

60

Plums

60

40

20

0

  1. What is each country’s cost ratio of producing plums and apples?

  2. Which nation should specialize in which product?

  3. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.)

  4. Suppose the optimum product mixes before specialization and trade were alternative B in New Zealand and alternative S in Spain. What would be the gains from specialization and trade?

What is the offshoring of white-collar service jobs, and how does it relate to international trade? Why has offshoring increased over the past few decades? Give an example (other than that in the text) of how offshoring can eliminate some U.S. jobs while creating other U.S. jobs.

Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ________ should specialize in producing fish while ________ should specialize in producing lumber.

  1. Canada; Iceland

  2. Iceland; Canada

How might protective tariffs reduce both the imports and the exports of the nation that levies tariffs? How might import competition lead to quality improvements and cost reductions by U.S. firms?

Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States’ most important trading partner, quantitatively? With what country does the United States have the largest trade deficit?
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