Question

5. The price of trade Suppose that France and Austria both produce oil and stained glass. France's opportunity cost of producing a pane of stained glass is 5 barrels of oil while Austria's opportunity cost of producing a pane of stained glass is 10 barrels of oil. has a comparative advantage in the By comparing the opportunity cost of producing stained glass in the two countries, you can tell that production of stained glass and has a comparative advantage in the production of oil. France Suppose that France and Austria consider trading stained glass and oil with each other. France can g Austria specialization and trade as long as it receives more than of oil for each pane of stained glass it exports to Austria. Similory Austria can gain from trade as long as it receives more than 2 of stained glass for each barrel of oil it exports to France. 1 pane, 1/10 pane. 1/5 pane, 5 panes, 10 Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of oil) would allow both Austria and France to gain from trade? Check all that apply. 12 barrels of oil per pane of stained glass 9 barrels of oil per pane of stained glass 6 barrels of oil per pane of stained glass 2 barrels of oil per pane of stained glass

Answer 1

(1) Opportunity cost (OC) of stained glass is lower in France and higher in Austria. So France has comparative advantage in stained glass and Austria has comparative advantage in oil.

(2) France can gain if it receives more than 5 barrels of oil per pane of glass and Austria can gain if it receives more than 1/10 pane of glass per oil.

(3) Therefore, following terms of trade are mutually beneficial and acceptable:

- 12 barrels of oil per pane of glass

- 9 barrels of oil per pane of glass

- 6 barrels of oil per pane of glass