1.

In stage 3, if both countries prefer equal consumption of both goods, new Zealand will trade 100
bushels of wheat for 200 bales of cotton to Australia. New Zealand can now have 350 units of
both goods that were 300 units earlier. Australia now have 100 units of both goods that was
only 75 earlier.
2. Comparative Advanatage means lower opportunity cost. And here is the reasom why
3. Our next question is how that bigger pie is to be divided up between the two countries.
4. The ratio at which a country can trade domestic products for imported products is the terms of
trade.
5. Exchange rates

Before a citizen of one country can buy a product made in another country or sold by someone in
another country. a currency swap must take place.for example, dollars into yen, peso to real and
euro to won.

6. In Brazil, timber is priced at 3 reals (R) per foot and steel is priced at 4 R per meter. In the United
States, timber costs $1 per foot and steel costs $2 per meter.

Suppose U.S. and Brazilian buyers have the option of buying at home or importing to meet their
needs. The options they choose will depend on the exchange rate.

7. What determines whether a country has a comparative advantage in heavy manufacturing or in

agriculture? What explains the actual trade flows observed around the world? Most economists
look to factor endowments—the quantity and quality of labor, land, and natural resources of a
country—as the principal sources of comparative advantage.
8. Heckscher-Ohlin theorem ties the theory of comparative advantage to factor endowments. It
assumes that products can be produced using differing proportions of inputs. According to this
theorem, a country has a comparative advantage in the production of a product if that country
is relatively well endowed with inputs used intensively in the production of that product.
9. Comparative advantage is not the only reason countries trade

Just as industries within a country differentiate their products to capture a domestic market, they
also differentiate their products to please the wide variety of tastes that exists worldwide.

Just as product differentiation is a natural response to diverse preferences within an economy, it is

also a natural response to diverse preferences across economies.