Homework Help: Trade limit specialisation ! NEED HELP!

1. Nov 24, 2008

phynoob

This is the question..

Suppose that by devoting all of its resources to the production of A, the nation of Econia can produce 50A. By devoting all of its resources to the production of B, Econia can produce 25B. The comparable figures for the nation of Optima are 5A and 5B. According to the principle of comparative advantage, which nation will specialise in which products? What are the limits to the terms of trade?

My attempt on the question: Econia will produce A and Optima will produce B due to Compa. Advantage.
Limit : 1A=1A to 1B= 2B (im not sure whether it is correct anot)

Can anyone highlight on the methods or a guideline to derive the trade limit for specialisation?

APPRECIATED! :D

2. Nov 24, 2008

CRGreathouse

All that matters for comparative advantage is, well, the comparative advantage. The first can produce 2 A for every B, while the second can produce only 1. Therefore the first 'should' specialize in A and the second in B.

3. Nov 25, 2008

phynoob

thx ggreathouse..i do understand the concept of specialisation. But, how do u establish a trade limit equation???

4. Nov 25, 2008

phynoob

Bump!

5. Nov 25, 2008

AeroFunk

the limits for the price of trade will be whenever the country can produce the good by itself for less cost, for example if B trades for more then 2A then one country would be better off not trading.