📦 Question 1 – Ricardian Model: Comparative Advantage and Trade Gains

What is the opportunity cost of producing 1 unit of tequila in the USA?

2 units of rice.

What is the opportunity cost of producing 1 unit of tequila in Mexico?

Approximately 0.714 units of rice.

Which country has a comparative advantage in producing rice?

USA, because it gives up less tequila per unit of rice.

What is the lowest price Mexico will accept for 1 tequila in trade?

0.714 units of rice per tequila (its opportunity cost).

What are the terms of trade if 1 tequila = 1 rice?

Both countries gain: USA imports tequila cheaper than opportunity cost, Mexico exports above its cost.

How do both countries gain from specialization and trade?

They consume beyond their PPFs by specializing in their comparative advantage and trading.

If the USA has 300 workers and Mexico 2, who gains more from trade?

Mexico gains more in relative (% of consumption) terms. Because the larger country drives the price and Mexico can export tequilas at a price a lot closer to 2 now