Assume that there are two countries, A and B, that produce two goods, X and Y, with the following production possibilities Country A can produce 120 units of good X or 80 units of good Y with all of its resources Country B can produce 60 units of good X or 120 units of good Y with all of its resour...

The detailed answer for the above question is provided below To calculate the autarky relative price of good X in each country we need to determine th ...

Assume that there are two countries, A and B, that produce two goods, X and Y, with

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Assume that there are two countries, A and B, that produce two goods, X and Y, with the following production possibilities:

Country A can produce 120 units of good X or 80 units of good Y with all of its resources.
Country B can produce 60 units of good X or 120 units of good Y with all of its resources. Assume that the opportunity cost of producing one unit of good X in terms of good Y is lower for country B than for country A. Calculate the autarky relative price of good X in each country and determine which country has a comparative advantage in the production of good X. If the two countries specialize according to their comparative advantage, what is the world relative price of good X under free trade and the world terms of trade?