Post on 05-Jan-2016
description
1000
500
1000
1000 Wheat
Coffee Coffee
Wheat
Finding the TERMS OF TRADE
BRAZIL MEXICO
1 Coffee = ____ Wheat 1 Coffee = _____ Wheat
1 Wheat = ____ Coffee 1 Wheat = ____ Coffee
Opportunity Cost Table
BRAZIL
MEXICO
(gain) (cost)
1
2
1/2
1
Brazil must give less than 1 wheat per coffee
Mexico needs more than ½ wheat per coffee
Terms of Trade = 1 > X > ½ wheat per coffeeThis makes both countriesProduce to the right of their PPF graph
BRAZIL MEXICO
1000
500
1000
1000 Wheat
Coffee
Coffee
Wheat
* (500,500)* (250,500)
400 Coffee
300 Wheat
BRAZIL
0 Coffee
1,000 Wheat
1,000 Coffee
0 Wheat
MEXICO
.(700, 400)
.(300, 600)
after trade
after trade
Trade Example at a .75 ratio
TRADE EXAMPLE
Mexico needs more than ½ wheat per coffee
Brazil must give less than 1 wheat per coffee
Terms of Trade = 1 > X > ½ wheat per coffee