In the link below, what are the limits of the terms of trade for the two goods?What is the answer 1. d)

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In this situation, we need to determine the circumstances in which each country will be willing to trade Blu-ray discs for Blu-ray players.  In order to fall within the limits of the terms of trade, the trade must in some way benefit both sides. 

From the table, we can see that the fictional country of Aries can make 25 discs or one player per worker per day.  Pisces can make 20 discs or 4 players.  Therefore, each country will only trade if it can get more of the product than it could make itself.  In this case, Pisces will want to buy discs and Aries will want to buy players.

If Aries wanted to make more players domestically, it would essentially have to “trade” 25 discs for each player because each player would take one worker one day to make and that worker could have spent that day making 25 discs.  Therefore, Aries will buy players so long as it can get more than one player in exchange for 25 discs.  If it can get more than one player, it comes out ahead and it will trade.

The same calculation is done by Pisces.  It would have to trade 4 players to make 20 discs of its own.  Therefore, it will buy discs from Aries so long as it can get more than 20 discs for 4 players (or 5 discs for 1 player). 

Therefore, the limits of the terms of trade are that Aries will trade if it can get more than one player in exchange for 25 discs and Pisces will trade so long as it can get more than 20 discs for 4 players.

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