Suppose that the comparative-cost ratios of two products—mangoes and sardines—ar

Question

Suppose that the comparative-cost ratios of two products—mangoes and sardines—are as follows in the hypothetical nations of Mangolia and Sardinia: Mangolia: 1 mango = 2 cans of sardines Sardinia: 1 mango = 4 cans of sardines In this scenario, ______________ should specialize in mangoes and ______________ should specialize in sardines. Would a trade of 2 mangoes = 3 cans of sardines be acceptable to both nations? A. Mangolia; Sardinia; Yes B. Sardinia; Mangolia; Yes C. Sardinia; Mangolia; No D. Mangolia; Sardinia; No

Explanation / Answer

A country will have comparative advantage in that good which it can produce at a lower relative cost, and it will specialize in that good.

Relative cost of mango in Mangolia = 2 Sardines

Relative cost of mango in Sardinia = 4 Sardines > 2 Sardines

So, Mangolia can produce mango at a lower relative cost & should specialize in mango. Therefore, Sardania should specialize in Sardines.

Terms of trade is 2 mangoes = 3 sardines

In Mangolia, 2 mangoes cost 4 sardines. So this price is not acceptable to Mangolia since it is being offered at a lower price for mangoes, its exportables.

In Sardania, 2 mangoes cost 8 sardines. So this offer is acceptable to Sardania which is being offered a lower price of mango, its importables.

Correct answer: Mangolia: No, Sardania: Yes

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