The opportunity cost of producing goods X in country A is 3 units of good Y and that in country B is 5…
Both countries gain when the price of X in terms of Y lies between 3 and 5. Country A can produce X at a cost of 3 units of Y and benefits from selling it for more than 3,…
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The opportunity cost of producing goods X in country A is 3 units of good Y and that in country B is 5 units of good Y. For which one of the following terms of trade defined as price of X in terms of Y, will both the countries gain from international trade ?
Answer and explanation
Correct answer B
Both countries gain when the price of X in terms of Y lies between 3 and 5. Country A can produce X at a cost of 3 units of Y and benefits from selling it for more than 3, while country B benefits from buying it for less than its domestic cost of 5. Reciprocal bounds would apply to the price of Y in terms of X.
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Himachal Pradesh SET (HP SET)