Question

International Trade

The table below shows how much cheese and how much wine an hour of labor produces in Portugal and in Spain.

	Cheese (kg)	Wine (liters)
Portugal	1	0.8
Spain	0.2	0.4

Saved

In the scenario above, Portugal has an absolute advantage in producing:

Question 26 options:

	Wine
	Cheese
	Neither good
	Both goods

In the scenario above, in Spain the opportunity cost of 1 kg of cheese is _____ liters of wine.

Question 27 options:

	0.5
	1.25
	5
	2
	0.8

In the scenario above, Portugal has a comparative advantage in producing:

Question 28 options:

	Both goods
	Neither good
	Wine
	Cheese

In the scenario above, can Portugal benefit from trade with Spain?

Question 29 options:

	No, because Portugal has a comparative advantage in both goods.
	Yes, if Portugal exports cheese and imports wine.
	Yes, if Portugal exports both goods to Spain.
	Yes, if Portugal exports wine and imports cheese.
	No, because Portugal is more productive in both goods.

In the scenario above, terms of trade that would be acceptable for both countries are _____ kg of cheese per liter of wine.

Question 30 options:

	0.4
	1.3
	1.5
	0.8
	0.3

Answer 1

26. Portugal has an absolute advantage in producing Cheese because it can produce more cheese with the given resources. Hence, option(B) is correct.

27. In Spain, the opportunity cost of 1 kg of cheese is 0.4/0.2= 2 liters of wine . Hence, option(D) is correct.

28. In Portugal , the opportunity cost of 1 kg of cheese is 0.8/1= 0.8 liters of wine. Because Portugal has the lower opportunity cost for the production of cheese .This implies Portugal has a comparative advantage in producing Cheese. Hence, option(D) is correct.

29. Yes, Portugal benefit from trade with Spain, If Portugal exports cheese and imports wine. Hence, option(B) is correct.

30. Terms of trade that would be acceptable for both countries should be lie 1/2 and 1/0.8 kg of cheese per liter of wine. That is terms of trade should lie between 0.5 and 1.25 kg of cheese per liter of wine. Therefore, The terms of trade that would be acceptable for both countries are 0.8 kg of cheese per liter of wine .Hence, option(D) is correct.