Question

 3. Terms of trade

 Suppose that Greece and Austria both produce fish and cheese. Greece's opportunity cost of producing a pound of cheese is 4 pounds of fish while

 Austria's opportunity cost of producing a pound of cheese is 10 pounds of fish.

 By comparing the opportunity cost of producing cheese in the two countries, you can tell that _______ has a comparative advantage in the production of cheese and _______  has a comparative advantage in the production of fish.

 

 Suppose that Greece and Austria consider trading cheese and fish with each other. Greece can gain from specialization and trade as long as it receives

 more than _______  of fish for each pound of cheese it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _______ of cheese for each pound of fish it exports to Greece.

 Based on your answer to the last question, which of the following terms of trade (that is, price of cheese in terms of fish) would allow both Austria and Greece to gain from trade? Check all that apply.

•  18 pounds of fish per pound of cheese

•  9 pounds of fish per pound of cheese

•  1 pound of fish per pound of cheese

•  3 pounds of fish per pound of cheese

Answer 1

By comparing the opportunity cost of producing a pound of cheese in the two countries, you can tell that ____GREECE_ has a comparative advantage in the production of cheese and _AUSTRIA_ has a comparative advantage in the production of fish.

Reason- The country which have less opportunity cost has a comparative advantage in the production of that good.

Greece produces cheese because 4< 10

Austria produces fish because 1/4> 1/10

Greece can gain from specialization and trade as long as it receives more than __4 pounds__ of fish for each pound of cheese it exports to Austia. Similarly, Austria can gain from trade as long as it receives more than __1/10 pounds__ of cheese for each pound of fish it exports to Greece.

Reason- Both the countries will only be better off from the trade when they can import more than the opportunity cost of production.

Gains from trade will occur with the price of cheese in terms of fish that is more than 4 and less than 10.

■ 9 pounds of fish per pound of cheese.

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