Bregos and Talmira are the only two countries that produce Wheat and Furniture. Each country has exactly one worker-month of labour available, and that worker-month can be used to produce Wheat or Furniture, but not both at once, as shown in Table 1. Table 1: maximum output from…

Answer: ((a)) Opportunity cost of one unit of Furniture equals Wheat output divided by Furniture output, so Bregos's opportunity cost is 80 ÷ 20 = 4 tonnes of Wheat, and Talmira's opportunity cost is 30 ÷ 15 = 2 tonnes of Wheat ((b)) Talmira has the comparative advantage in Furniture, because its opportunity cost of 2 tonnes of Wheat per unit of Furniture is lower than Bregos's opportunity cost of 4 tonnes of Wheat per unit of Furniture ((c)) Trade benefits both countries at any terms of trade between 2 and 4 tonnes of Wheat per unit of Furniture, since Talmira will only export Furniture if it receives more Wheat per unit than its own opportunity cost of 2 tonnes, and Bregos will only import Furniture if it pays less…. Part (a): Opportunity cost of Furniture in each country The opportunity cost of producing one extra unit of Furniture is the quantity of Wheat that a worker-month could instead have produced: opportunity cost of 1 unit of Furniture = Wheat…

AS Level Economics 9708: Comparative Advantage and the Terms of Trade Range

Country	Wheat (tonnes)	Furniture (units)
Bregos	80	20
Talmira	30	15

Country

Wheat (tonnes)

Furniture (units)

Bregos

Talmira

Part (a): Opportunity cost of Furniture in each country

The opportunity cost of producing one extra unit of Furniture is the quantity of Wheat that a worker-month could instead have produced:

$\text{opportunity cost of 1 unit of Furniture} = \frac{\text{Wheat output}}{\text{Furniture output}}$

For Bregos: $\frac{80}{20} = 4 \text{ tonnes of Wheat}$

For Talmira: $\frac{30}{15} = 2 \text{ tonnes of Wheat}$

So producing one more unit of Furniture costs Bregos 4 tonnes of Wheat, but it costs Talmira only 2 tonnes of Wheat.

Part (b): Comparative advantage in Furniture

Comparing the two opportunity costs, Talmira’s opportunity cost of Furniture (2 tonnes of Wheat) is lower than Bregos’s (4 tonnes of Wheat). Since Talmira sacrifices relatively less Wheat output to produce Furniture, Talmira has the comparative advantage in Furniture. Even though it produces fewer absolute units of Furniture per worker-month than Bregos (15 against 20).

By elimination, Bregos has the comparative advantage in Wheat, which can be checked directly: the opportunity cost of one tonne of Wheat is Furniture output divided by Wheat output, giving Bregos $20 \div 80 = 0.25$ units of Furniture, against Talmira’s $15 \div 30 = 0.5$ units of Furniture. Since $0.25 < 0.5$ , Bregos does give up less Furniture per tonne of Wheat, confirming Bregos’s comparative advantage in Wheat.

Part (c): The mutually beneficial terms of trade range

For specialisation and trade to benefit both countries, the terms of trade (tonnes of Wheat given up per unit of Furniture received) must lie strictly between the two countries’ own opportunity costs of Furniture.

Talmira specialises in and exports Furniture. Producing Wheat itself would cost Talmira only 2 tonnes of Wheat “worth” of resources per unit of Furniture it gives up, so Talmira will only agree to export Furniture if it receives more than 2 tonnes of Wheat per unit. Otherwise it would do at least as well producing Wheat directly.
Bregos specialises in and exports Wheat, importing Furniture in return. Producing Furniture itself would cost Bregos 4 tonnes of Wheat per unit, so Bregos will only agree to import Furniture if it pays less than 4 tonnes of Wheat per unit. Otherwise it would do at least as well producing Furniture domestically.

Combining both conditions, trade benefits both countries at any terms of trade strictly between:

$2 \text{ tonnes of Wheat per unit of Furniture} < \text{terms of trade} < 4 \text{ tonnes of Wheat per unit of Furniture}$

Any exchange rate inside this range gives each country a better deal from trading than it could achieve by producing both goods itself.

Final answers

(a) Opportunity cost of 1 unit of Furniture: Bregos $=$ 4 tonnes of Wheat; Talmira $=$ 2 tonnes of Wheat.
(b) Talmira has the comparative advantage in Furniture (lower opportunity cost, 2 < 4).
(c) Mutually beneficial terms of trade $=$ between 2 and 4 tonnes of Wheat per unit of Furniture.