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21 January, 14:50

Suppose Mexico's opportunity cost for producing 1 unit of food is 3 units of clothing and the United States' opportunity cost for producing 1 unit of food is 0.5 units of clothing. Trade at a ratio of 1:1 is beneficial to both countries. How beneficial would it be for Mexico if the trading ratio were 1 unit of clothing for every 2 units of food?

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  1. 21 January, 15:16
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    Mexico export 1 unit of cloth and import 2 unit of food

    Explanation:

    given data

    Mexico's cost producing 1 unit of food = 3 units of clothing

    US cost producing 1 unit of food = 0.5 units of clothing

    Trade ratio = 1:1

    to find out

    How beneficial would it be for Mexico

    solution

    as given in question we know that Mexico opportunity cost of producing food is lower in the US

    so here United States will produce food and Mexico will produce cloth

    and trade ratio is 1:1 so that Mexico has export 1 unit of cloth and can import 1 unit of food

    and

    when the trade ratio is 1 unit of clothing for every 2 unit of food

    Mexico export 1 unit of cloth and import 2 unit of food

    so as that Mexico will gains more by later trade ratio
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