Assume that initially country A exchanges three barrels of oil for one ton of steel from country B. Later the arrangement changes to four barrels of oil for one ton of steel. This indicates that:

a) the relative price of steel in terms of oil has fallen.

b) country A has a comparative advantage in the production of steel.

c) country B has an absolute advantage in the production of oil.

d) the terms of trade for country A have improved.

e) the terms of trade for country B have improved.

Question

Business

Rocha

11 September, 05:43

Assume that initially country A exchanges three barrels of oil for one ton of steel from country B. Later the arrangement changes to four barrels of oil for one ton of steel. This indicates that:

a) the relative price of steel in terms of oil has fallen.

b) country A has a comparative advantage in the production of steel.

c) country B has an absolute advantage in the production of oil.

d) the terms of trade for country A have improved.

e) the terms of trade for country B have improved.

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Answers (1)

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Manuel Brandt · Answer 1

the terms of trade for country B have improved.

Answer: Option E.

Explanation:

The terms of trade is the relative price of exports in terms of imports and is characterized as the proportion of fare costs to import costs. It very well may be deciphered as the measure of import products an economy can buy for each unit of fare merchandise.

In the example given above, the exchange of the oil with steel went in favor of country B and caused disadvantage for the country A. This means that terms of trade for country B improved because country B can get more oil with same amount of steel.