Homework Answers
f) According to the theory of comparative advantage a country can gain from trade if it specializes and exports a good it has a comparative advantage in. Here Chile has a comparative advantage in wine and Germany has it in beer. Then Chile should export wine while Germany should export beer.
Then the correct options are in particular order:
- beer
- Wine
g) For Germany, the cost of 1 case of wine is 1 beer. In the world market, Germany can buy 1.5 cases of wine for 1 case of beer. Then trade is beneficial for Germany. The cost of 1 case of beer in Chile is 2 case of wine. Chile is getting 1.33 cases of beer for 2 wine in the world market. Then trade also beneficial for Chile. Hence, the terms of trade are mutually beneficial.
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