This document discusses terms of trade, which determine the rate at which countries are willing to trade goods on the world market. Terms of trade can be expressed through monetary prices or bartering amounts. They are influenced by economic and non-economic factors and must be negotiated through political agreements. There is no single optimal terms of trade between two countries, but rather a range of acceptable solutions. Understanding comparative advantage can help determine how countries may benefit from specializing and trading. The document then provides steps for solving terms of trade problems, such as constructing output tables, determining opportunity costs, and setting negotiated terms of trade to calculate maximum gains from specializing and trading for each country.

1. Terms of Trade
(macro)
Christa Washington
AP Economics
May 16, 2013
7th period

2. TERMS OF TRADE
• Determine the rate at which one country is willing to trade one
item for another item on the world market
• Trade terms may be expressed in either monetary or bartering
vocab
• As monetary expression, terms of trade are stated as a world price, the subject
of upcoming discussion
• When viewed from a bartering standpt, trade terms refer to the amt of certain
items 2 countries are willing to exchange w/ one another
• Trade terms are influenced by eco and non eco factors and must be
negotiated through a political process
• There is no unique set of optimal trade terms btwn 2 countries
• A range of aceptable trade solutions exists from which the countries must
select through trade agreements
• Knowing how a country benefits form specializing can help us determine how
it may benefit from trade- shifts PPC outward

3. SOLVING TERMS OF TRADE PROBLEMS
• If necessary, construct an output table using
the data for two nations- this reps their
production possibilities before trade
Item A Item B
Nation C 100 200
Nation D 40 200

4. CONTINUED…
• Determine the cost ratios and comparative
adv of each nation
• Select one product as a reference and use its
cost ration to determine its per-unit
opportunity cost for each nation
Item A Item B
Nation C 2* 1/2
Nation D 5 1/5*
Nation C: 1A= 2B …Nation C not willing to trade As for less than 2Bs apiece
Nation D: 1A= 5B.…Nation D not willing to trade As for more than 5 Bs apiece

5. CONTINUED…
• Set a term of trade somewhere btwn the two
boundaries
• 1A= XB where 2< X< 5
• Say 1A= 3B is negotiated as a trade term
• Calculate the max amt of each item each nation
can gain through trade
• Nation whose cost adv is item A should MULTIPLY its output
of that item by the term of trade
• Nation whose cost adv is item B should DIVIDE its output of
that item by the term of trade
– Nation C: 100A x (3B per A)= 300B
– Nation D: 200B / (3B per A)= 66 2/3A

6. CONTINUED….
• Plot the TPC for each nation and show the
gains from trade, if requires
Nation C Nation D
Gains from trade
Item A
Item B
TPC
PPC
300
200
100
Gains from trade
Item A
Item B
200
40 66 2/3