Illustrate the rate of exchange of two products

Question

Illustrate the rate of exchange of two products?

Answer 1

The rate of exchange of these two products will be determined through negotiation; the outcome is called the terms of trade.  The terms of trade will be limited by the relative costs of production within each country.  The U.S. will not forgo more than 1 ton of soybeans to get 3 tons of avocados and Mexico will not give up more than 4 tons of avocados for 1 ton of soybeans.  Somewhere between these limits, trade is possible.  In the text example, the terms of trade are assumed to be 3.5 tons of avocados for each ton of soybeans.  Americans would specialize in soybeans only if they could obtain more than 3 tons of avocados for 1 ton of soybeans by trading with Mexico.