1000

500

1000

1000 Wheat

Coffee Coffee

Wheat

Finding the TERMS OF TRADE

BRAZIL MEXICO

1 Coffee = ____ Wheat 1 Coffee = _____ Wheat

1 Wheat = ____ Coffee 1 Wheat = ____ Coffee

Opportunity Cost Table

BRAZIL

MEXICO

(gain) (cost)

1

2

1/2

1

Brazil must give less than 1 wheat per coffee

Mexico needs more than ½ wheat per coffee

Terms of Trade = 1 > X > ½ wheat per coffeeThis makes both countriesProduce to the right of their PPF graph

BRAZIL MEXICO

1000

500

1000

1000 Wheat

Coffee

Coffee

Wheat

* (500,500)* (250,500)

400 Coffee

300 Wheat

BRAZIL

0 Coffee

1,000 Wheat

1,000 Coffee

0 Wheat

MEXICO

.(700, 400)

.(300, 600)

after trade

after trade

Trade Example at a .75 ratio

TRADE EXAMPLE

Mexico needs more than ½ wheat per coffee

Brazil must give less than 1 wheat per coffee

Terms of Trade = 1 > X > ½ wheat per coffee