Macro Unit 1, Question 11- Terms of Trade

The video tutorial explains the concept of terms of trade, focusing on opportunity costs and comparative advantage. It uses the example of two countries, X and Y, trading cars and corn. The tutorial discusses how different trade deals can benefit or disadvantage each country, depending on their opportunity costs. It provides a method to determine optimal terms of trade that benefit both parties, emphasizing the importance of setting up a chart to visualize the trade-offs. The tutorial concludes by noting that terms of trade questions are more common in macroeconomic tests.

Which country has a comparative advantage in producing cars?

• Country X

• Country Y

• Both countries

• Neither country

Why is trading one car for three corn beneficial for both countries?

• It reduces the production costs for both countries.

• It allows both countries to produce more cars.

• It ensures both countries can produce more corn.

• It aligns with the opportunity costs of both countries.

What happens if country X trades one car for ten corn?

• Both countries benefit equally.

• Country X benefits, but country Y does not.

• Country Y benefits, but country X does not.

• Neither country benefits.

What is the trick to finding the right terms of trade?

• Guessing based on previous trades.

• Setting up a chart to find beneficial trade ratios.

• Using a calculator to find exact values.

• Asking an expert for advice.

In which type of tests are terms of trade questions more likely to appear?

• Microeconomic tests

• Macroeconomic tests

• Both micro and macroeconomic tests

• Neither micro nor macroeconomic tests