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C) The conditions of trade — the exchange ratio
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But the consumers of each nation will want both wheat and coffee. Specialization implies the
need to trade or exchange the two products. What will be the terms of trade? At what exchange
ratio will the United States and Brazil trade wheat and coffee? We know that because 1 W - 1С in
the United States, the United States must get more than 1 ton of coffee for each ton of wheat
exported or it will not pay the United States to export wheat in exchange for Brazilian coffee.
Similarly, because 1 W= 2С in Brazil, we know that Brazil must be able to get 1 ton of wheat by
exporting some amount less than 2 tons of coffee. Brazil must be able to pay a lower “price” for wheat in
the world market than it must pay domestically, or it will not wish to engage in international trade.
Thus we can be certain that the international exchange ratio or terms of trade must lie somewhere
between 1 W = 1С and 1 W = 2 C.
Of course, the United States will prefer a rate close to 1 W = 2 C, say, 1 W = 1,75C. Americans
want to get a great deal of coffee for each ton of wheat they export.
Similarly, Brazil desires a rate approximating 1 W= 1C, say, 1 W= 1,25 C. Brazil wants to export
as little coffee as possible for each ton of wheat it receives in exchange.
The actual exchange ratio that will materialize between the two limits depends upon world
supply and demand conditions for the two products. If the overall world demand for coffee is weak
relative to its supply and the demand for wheat is strong relative to its supply, the price of coffee will
be low and that of wheat high. The exchange ratio will settle near 1 W= 2 С figure preferred by the
United States. Under the opposite world supply and demand conditions, the ratio will settle near
the 1 W — 1C level most favorable to Brazil.
The crucial fact to note is that by specializing according to comparative advantage and trading
for those goods produced with the least relative efficiency domestically, both the United States and
Brazil can realize combinations of wheat and coffee which lie beyond their production possibilities
boundaries. Specialization according to comparative advantage results in a more efficient allocation of
Дата публикования: 2014-12-28; Прочитано: 235 | Нарушение авторского права страницы | Мы поможем в написании вашей работы!
