Question

Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡ 1W in Switzerland but 1C ≡ 4W in Japan. At which of the following international exchange ratios (terms of trade) will Switzerland and Japan be willing to specialize and engage in trade with each other? Select one or more answers from the choices shown.

1. 1C ≡ 3W

2. 1C≡1/2W

3. 1C ≡ 5W

4. 1/2C≡1W

5. 2C ≡ 1W

Short answer

The correct options are: a) 1C ≡ 3W, and d) 1/2C≡1W

Step-by-step solution

Step 1. Explanation

The terms of trade represent the ratio of export price and import price. The terms of trade should be between the opportunity costs of the two countries. For Switzerland, 1 cheese needs to be given for 1 watch; thus, it will be better off if ½ cheeses need to be given for 1 watch. For Japan, 4 watches need to be given for 1 cheese; thus, it will be better off by giving 3 watches for 1 cheese. Hence, 1C ≡ 3W, and 1/2C≡1W is between 1C ≡ 1W and 1C ≡ 4W.