APMacro: Terms of Trade


The terms of trade is the exchange rate between two commodities, for example, two bananas for 30 grapes. The terms of trade are expressed in terms of the commodities to be exchanged. For each country there is a range of acceptable terms of trade.

Oranges Avocados CA

For the United States, the opportunity cost of producing one bushel of oranges is two bushels of avocados. For Israel, the opportunity cost of producing one bushel of oranges is four bushels of avocados. The United States is willing to trade one bushel of oranges for two or more bushels of avocados; Israel is willing to trade one bushel of oranges for less than four bushels of avocados. Thus, both the United States and Israel would be willing to trade one bushel of oranges for three bushels of avocados. Both countries gain from the trade.

Arrows-02-june

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