Question

5. The price of trade Suppose that Portugal and Sweden both produce jeans and stained glass. Portugal's opportunity cost of producing a pane of stained glass is 5 pairs of jeans while Sweden's opportunity cost of producing a pane of stained glass is 10 pairs of jeans. has a comparative advantage in By comparing the opportunity cost of producing stained glass in the two countries, you can tell that the production of stained glass and Sweden has a comparative advantage in the production of jeans. Suppose that Portugal and Sweden consider trading stained glass and jeans with each other. Portugal can gain from specialization and trade as long as it receives more than of jeans for each pane of stained glass it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than of stained glass for each pair of jeans it exports to Portugal. Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of jeans) would allow both Sweden and Portugal to gain from trade? Check all that apply. 6 pairs of jeans per pane of stained glass 1 pair of jeans per pane of stained glass 7 pairs of jeans per pane of stained glass 0 4 pairs of jeans per pane of stained glass

Answer 1

a) As the opportunity cost is less for Portugal in the production of glass they have a comparative advantage in the production is glass and sweden has a comparative advantage in the production of jeans.

b) Portugal will benefit when they are getting more than 5 jeans for a glass and Sweden will benefit if they have to get more than 1/5 of glass for a jeans.

c) The terms of trade will be between 5 to 10 jeans.

The answer is "A" and "C".