Question

The price of trade

Suppose that Spain and Switzerland both produce rye and stained glass. Spain's opportunity cost of producing a pane of stained glass is 5 bushels of rye while Switzerland's opportunity cost of producing a pane of stained glass is 11 bushels of rye.

By comparing the opportunity cost of producing stained glass in the two countries, you can tell that ............... has a comparative advantage in the production of stained glass and ................. has a comparative advantage in the production of rye.

Suppose that Spain and Switzerland consider trading stained glass and rye with each other. Spain can gain from specialization and trade as long as it receives more than.................. bushel   of rye for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than.............. pane   of stained glass for each bushel of rye it exports to Spain.

Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of rye) would allow both Switzerland and Spain to gain from trade? Check all that apply.

17 bushels of rye per pane of stained glass

10 bushels of rye per pane of stained glass

9 bushels of rye per pane of stained glass

1 bushel of rye per pane of stained glass

Answer 1

By comparing the opportunity cost of producing stained glass in the two countries, you can tell that SPAIN(Because it has to give up only 5 bushels of Rye compared to Switzerland's 11) has a comparative advantage in the production of stained glass and Switzerland has a comparative advantage in the production of rye(Because Spain produces 5 pounds of Rye if it gives up the production of 1 stained glass whereas Switzerland produces 11 pounds of Rye.So,Spain's opportunity cost of producing a pound of rye is 1/5 whereas Switzerland's opportunity cost is 1/11 for a stained glass which is lower than that of Spain's).

Suppose that Spain and Switzerland consider trading stained glass and rye with each other. Spain can gain from specialization and trade as long as it receives more than 5 bushel of rye for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than 1/11 pane   of stained glass for each bushel of rye it exports to Spain.

Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of rye) would allow both Switzerland and Spain to gain from trade?

As Spain gains if it gets more than 5 bushels for each pane whereas Switzerland gains if it gets more than 1/11 so any price ratio between 5 and 11 will benefit both countries.

Option (B) and (C)