Artland and Rayland. Using
equal amounts of resources, Artland can produce 600 hats or 300 bicycles, whereas Rayland can produce
1,200 hats or 300 bicycles.

(c) If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following?
(i) Artland
(ii) Rayland
I simply do not understand the question

Question

Artland and Rayland. Using 
equal amounts of resources, Artland can produce 600 hats or 300 bicycles, whereas Rayland can produce  
1,200 hats or 300 bicycles.

(c) If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following?  
 (i) Artland 
 (ii) Rayland
 I simply do not understand the question

anonymous · Answer

This question has to do with comparative advantage. This link provides a good explanation: http://en.wikipedia.org/wiki/Comparative_advantage#Effect_of_trade_costs In this scenario, it will be best for everyone if Artland uses all his resources to produce 300 bicycles and Rayland uses all his resources to produce 1,200 hats. Here, 1 bicycle can be produced using the same amount of resources as 4 hats. The question is asking who would benefit most from a trade of 5 hats for 1 bicycle. The answer is Artland because with all things being equal, he would trade 1 bicycle for 4 hats. With this new agreement, he is getting 5 hats. Rayland would not agree to this deal because he could just as easily reallocate his resources from producing 4 hats to produce 1 bicycle.