Suppose Mexico's opportunity cost for producing 1 unit of food is 3 units of clothing and the United States' opportunity cost for producing 1 unit of food is 0.5 units of clothing. Trade at a ratio of 1:1 is beneficial to both countries. How beneficial would it be for Mexico if the trading ratio were 1 unit of clothing for every 2 units of food?

Mexico export 1 unit of cloth and import 2 unit of food

Explanation:

given data

Mexico's cost producing 1 unit of food = 3 units of clothing

US cost producing 1 unit of food = 0.5 units of clothing

Trade ratio = 1:1

to find out

How beneficial would it be for Mexico

solution

as given in question we know that Mexico opportunity cost of producing food is lower in the US

so here United States will produce food and Mexico will produce cloth

and trade ratio is 1:1 so that Mexico has export 1 unit of cloth and can import 1 unit of food

and

when the trade ratio is 1 unit of clothing for every 2 unit of food

Mexico export 1 unit of cloth and import 2 unit of food

so as that Mexico will gains more by later trade ratio