Question

If the actual terms of trade are 1 belt for 1.5 swords and 70 belts are traded, how many belts will Morocco gain compared to the "without trade" numbers?

Answer 1

Answer:

If Morocco produces 120 belts and exports 70 belts:

• it will receive 105 swords (= 70 x 1.5)
• it will consume 50 belts (its domestic consumption of belts will decrease by 10)

Explanation:

Without trade, Morocco will produce 60 swords and 60 belts and consume them all, but if it engages in trade, it will produce 120 belts.

• Morocco's opportunity cost of producing one belt = 60 / 60 = 1
• Morocco's opportunity cost of producing one sword = 60 / 60 = 1

• Estonia's opportunity cost of producing one belt = 100 / 40 = 2.5
• Estonia's opportunity cost of producing one sword = 40 / 100 = 0.25

If Morocco produces 120 belts and keeps current consumption level:

• it consumes 60 belts
• it can trade 40 belts for 60 swords
• it will have a 20 belt surplus production

If Morocco produces 120 belts and exports 70 belts:

• it will receive 105 swords (= 70 x 1.5)
• it will consume 50 belts