Question

Suppose Spain and Sweden both produce jeans and shoes. Spain's opportunity cost of producing a pair of shoes is 3 pairs of jeans, while Sweden's opportunity cost ofproducing a pair of shoes is 6 pairs of jeans. By comparing the opportunity cost of producing shoes in the two countries, you can tell that____(Sweden or Spain) has acomparative advantage in the production of shoes and ____(Sweden or Spain) has a comparative advantage in the production of jeans.

Suppose that Spain and Sweden consider trading shoes and jeans with each other. Spain can gain from specialization and trade as long as it receives more than ____(3,1, 1/6, 6, 1/3) pairs of jeans for each pair of shoes it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than _____(1, 3, 1/3, 6,1/6) pairs of shoes for each pair of jeans it exports to Spain.

Based on your answer to the last question, which of the following terms of trade (that is, price of shoes in terms of jeans) would allow both Sweden and Spain gainfrom trade? Select all that apply:
7 pairs of jeans per pair of shoes
5 pairs of jeans per pair of shoes
2 pairs of jeans per pair of shoes
1 pair of jean per pair of shoes

Answer 1

You always have a comparative advantage in what you have the least opportunity cost of producing, so Spain has the comparative advantage in shoes and Sweden in jeans.
Since it costs Spain 1 pair of shoes to get three pairs of jeans, Spain can gain from trade if it gets more than 3 pairs of jeans for 1 pair of shoes, and Sweden can gain if it gets more than 1/6 pairs of shoes for every pair of jeans.
Five pairs of shoes per pair of jeans is the only one that works here. If you only get 1 or 2 pairs of jeans per pair of shoes, Spain is at a disadvantage, since it can get 3 for 1 by home production, and if you get 7 pairs of jeans per pair of shoes, Sweden is at a disadvantage since it is paying 7 pairs of jeans for what it can get at home by giving up 6 pairs.