Xenonia and Baltonia are two neighboring countries. Xenonia can either produce 300 pounds of rice or 100 bushels of corn in a year while Baltonia can either produce 500 pounds of rice or 200 bushels of corn

Can mutually profitable trade take place between the two countries? Explain your answer.

The opportunity cost of producing 1 pound of rice in Xenonia is 100 bushels/300 pounds = 0.33 bushels of corn and the opportunity cost of producing 1 bushel of corn is 300 pounds/100 bushels = 3 pounds of rice. Similarly, the opportunity cost of producing rice in Baltonia is 200 bushels/500 pounds = 0.4 bushels of corn and the opportunity cost of producing corn is 500 pounds/200 bushels = 2.5 pounds of rice. Thus, the opportunity cost of producing rice is lower in Xenonia and the opportunity cost of producing corn is lower in Baltonia. Therefore, mutually profitable trade is possible between the two countries on the basis of comparative advantage, if Xenonia specializes in the production and export of rice while Baltonia specializes in the production and export of corn.