Question

Suppose that Spain and Sweden both produce jeans and stained glass. Spain's opportunity cost of producing a pane of stained glass is 4 pairs of jeans while Sweden's opportunity cost of producing a pane of stained glass is 10 pairs of jeans. By comparing the opportunity cost of producing stained glass in the two countries, you can tell that has a comparative advantage in the production of stained glass and has a comparative advantage in the production of jeans. Suppose that Spain and Sweden consider trading stained glass and jeans with each other. Spain 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 Spain. 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 Spain to gain from trade? Check all that apply.

3 pairs of jeans per pane of stained glass
6 pairs of jeans per pane of stained glass
18 pairs of jeans per pane of stained glass
9 pairs of jeans per pane of stained glass

Answer 1

Both the countries will gain from trade if the price of trade is 6 pairs of jeans per pane of stained glass and 9 pairs of jeans per pane of stained glass.

Step-by-step explanation:

Spain has an opportunity cost of producing a pane of stained glass

= 4 pairs of jeans

Sweden has an opportunity cost of producing a pane of stained glass

= 10 pairs of jeans

Spain has an opportunity cost of producing a pair of jeans

=
`(1)/(4)`

= 0.25 panes of stained glass

Sweden has an opportunity cost of producing a pair of jeans

=
`(1)/(10)`

= 0.1 panes of stained glass

A country is said to be enjoying a comparative advantage if it can produce a good at a lower opportunity cost.

Spain has a comparative in producing stained glass, while Sweden has a comparative advantage in producing jeans.

Spain will gain from trade if it is getting more than 4 pairs of jeans for each pane of stained glass. While Sweden can gain from trade if it is getting more than 0.1 panes of stained glass for each pair of jeans.

Both the countries will gain from the trade if the price of trade is 6 pairs of jeans per pane of stained glass and 9 pairs of jeans per pane of stained glass.

Spain will not accept 3 pairs of jeans per pane of stained glass because it will not cover the opportunity cost. Sweden will not pay 18 pairs of jeans per pane of stained glass.