Assume that both countries completely specialize in that pro

Assume that both countries completely specialize in that product for which they have a comparative advantage, and the terms of trade are given as 1 car trades for 1 textile. If these two nations DO engage in trade, the maximum amount of textiles available for consumption in Country M is

Solution

Opportunity cost :

Since M has lower opportunity costs in Producing cars,M will specialise in cars and import textiles from N.

M will produce 30 cars.

Since N will specialise in textiles in which it has lower opportunity costs,so N will trade textiles.

If M trades all its cars to N that is it exchanges 30 cars at exchange rate 1:1,it can get Maximum 30 textiles.

So M can consume maximun 30 textiles after trade.

	CARS	TEXTILES
M	10/30=1/3 textiles	30/10=3 cars
N	30/15=2 textiles	15/30=1/2 cars