Q.Using the same data as Q1 (India's opportunity cost of Cloth = 2 Wheat; Country B's opportunity cost of Cloth = 1.2 Wheat), state the range within which the Terms of Trade for Cloth (in units of Wheat) must lie for both countries to gain from trade, and verify that 1.5 units of Wheat per unit of Cloth falls within this range.

The terms of trade only benefits both sides if it sits strictly between each country's own domestic cost — otherwise one side would rather not trade at all. …

For trade to benefit BOTH countries, the international terms of trade for Cloth must be better than each country's own domestic opportunity cost — i.e., it must lie strictly between Country B's domestic cost (1.2 Wheat, the LOWER bound, since B is the lower-cost producer of Cloth) and India's domestic cost (2.0 Wheat, the UPPER bound, since India is the higher-cost producer of Cloth):

Checking 1.5 units of Wheat per unit of Cloth:

• For India (which would import Cloth): at 1.5 Wheat per Cloth, India pays LESS than its own domestic cost of 2.0 Wheat per Cloth — India gains by importing Cloth rather than producing it domestically. …

Identify the lower bound as the lower-cost country's own domestic opportunity cost, and the upper bound as the higher-cost country's own domestic opportunity cost; any …

Setting the range using the WRONG country's cost as the upper/lower bound — the lower bound must come from whichever country has the comparative advantage (lower …