Terms of trade

Can you please repeat the terms of trade example

I’ll write it out here

So we know that the US has a cheaper opportunity cost when producing planes - 1 plane for 1/10 ships.

France has a cheaper opportunity cost when producing ships - 1 ship for 6 planes.

We want to find some amount of trade that will benefit both countries. I look at America who specializes in planes and wants cruise ships. Their opportunity cost for 1 ship is 10 planes. Basically, trade means that the US wants to have an opportunity cost less than 10 planes.

At the same time on the France side, they specialize in cruise ships. On the planes side normally for each plane they give up 1/6 ship. So they want to have a decreased opportunity cost than that 1/6 ship in order for trade to be worthwhile for them.

Thus, the terms of trade could be anything between 1 ship for 6 planes and 1 ship for 10 planes. I pick a nice even number in the middle - 1 ship for 8 planes.

Then, always double check terms of trade. Okay, we know that 1 ship for 8 planes is a cheaper opportunity cost for the US since normally they have to give up 10 planes.

If we divide we know that 1 ship for 8 planes is equivalent to 1 plane = 1/8 ship. France normally has to give up 1/6 ship for 1 plane, but now they only give up 1/8 of a ship. Thus 1 ship for 8 planes are good trade terms for US and France.

If we have time, I’ll do one during the FRQ portion.

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