Question

3. Terms of trade Suppose that Spain and Austria both produce beer and shoes. Spain's opportunity cost of producing a pair of shoes is 5 barrels of beer while Austria's opportunity cost of producing a pair of shoes is 11 barrels of beer. By comparing the opportunity cost of producing shoes in the two countries, you can tell that production of shoes and has a comparative advantage in the production of beer. has a comparative advantage in the Suppose that Spain and Austria consider trading shoes and beer with each other. Spain can gain from specialization and trade as long as it receives more than of beer for each pair of shoes it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than of shoes for each barrel of beer 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 beer) would allow both Austria and Spain to gain from trade? Check all that apply. D 6 barrels of beer per pair of shoes 16 barrels of beer per pair of shoes D 1 barrel of beer per pair of shoes 7 barrels of beer per pair of shoes Grade It Now I Save & Continue Continue wthout saying

Answer 1

ans

by comparing the opportunity cost of producing shoes in the two countries, you can tell that spain has comparative advantage in the production of shoes and austria has a comparative advantage in the production of beer

because opportunity of producing shoes is less in spain and opportunity of producing beer is less in austria

spain can gain from sepcialisation and trade as long as it receives more than 5 barrels of beer for each pair of shoes it exports to austria. similarly, austria can gain from trade as long as long it receives more than (1/11)=0.09090 pair of shoes for each barrel of beer it exports to spain

condition required for trade

if spain receives more than 5 barrel of beer and austria pay less than 11 barrel of beer , both will trade

if spain pay less than 1/5 pair of shoes and austria receive more than 1/11 barrel of beer , both will trade

accordingly

a) 6 barrel of beer per pair of shoes. - trade,

b) 16 barrels of beer per pair of shoes- no trade, austria will not pay so much beer as he can produce shoes domestically by scarificing 11 barrels of beer

c) 1 barrel of beer per pair of shoes. - no trade , because spain will not sell shoes at lower than 5 barrel of beer

d) 7 barrel of beer per pair of shoes -   trade