TutorOn by Sanath Withanage

Question:

For mutually beneficial trade to occur, at what exchange rate would Sri Lanka be willing to trade with India? (Output per unit of labour: SL = 10 Cinnamon / 30 Onion; India = 20 Cinnamon / 100 Onion)
(1) Less than 2 units of onion per one unit of cinnamon
(2) Less than 3 units of onion per one unit of cinnamon
(3) More than 5 units of onion per one unit if cinnamon
(4) Between 3 and 5 units of onion per one unit of cinnamon
(5) Between 2 and 4 units of onion per one unit cinnamon

Correct Answer:

(4)

Answer Explanation:

Calculate opportunity cost: For SL, 1 Cinnamon = 3 Onions (30/10). For India, 1 Cinnamon = 5 Onions (100/20). For trade to benefit both, the terms of trade for 1 unit of Cinnamon must fall between their domestic opportunity costs: between 3 and 5 Onions.

Topic: International Trade Year: 2023