Question

Suppose that Spain and Switzerland both produce beer and wine. Spain's opportunity cost of producing a bottle of wine is 4 brarrels of beer while Switzerland's opportunity cost of producing a bottle of wine is 10 barrels of beer.

By comparing the opportunity cost of producing wine in the two countries, you can tell that ____ has a comparative advantage int he production of wine and ___ has a comparative advantage in the production of beer.
Suppose that Spain and Switzerland consider trading wine and beer with each other. Spain can gain from specialization and trade as long as it receives mroe that ___ of beer for each bottle of wine it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than ___ of wine for each barrel of beer it exports to Spain.
Based on your answer to the last question, which of the folloiwing terms of trade ( that is, price of wine in terms of beer) would allow both Switzerland and Spain to gain from trade?
a. 6 barrels of beer per bottle of wine
b. 3 barrels of beer per bottle of wine
c. 9 barrels of beer per bottle of wine
d. 18 barrels of beer per bottle of wine

Answer 1

Spain has a comparative advantage in producing wine. While, Switzerland has a comparative advantage in Beer.

Step-by-step explanation:

Spain's opportunity cost of producing a bottle of wine is 4 barrels of beer while Switzerland's opportunity cost of producing a bottle of wine is 10 barrels of beer.

Spain has a lower opportunity cost of producing wine. Thus, we can say that Spain has a comparative advantage in producing wine.

Spain's opportunity cost of producing a bottle of beer is 1/4 barrels of wine while Switzerland's opportunity cost of producing a bottle of beer is 1/10 barrels of wine.

Switzerland has a lower opportunity cost of producing beer. Thus, we can say that Switzerland has a comparative advantage in producing beer.

Spain's opportunity cost of producing a bottle of wine is 4 barrels of beer. Thus, it can import more than 4 barrels of beer for each bottle of wine it produces and export to Switzerland. Thus, Spain can gain from trade as long as it receives more than 4 barrels of beer for each bottle of wine it exports to Switzerland.

Switzerland's opportunity cost of producing a bottle of beer is 1/10 barrels of wine. Thus, it can import more than 1/10 barrels of wine for each bottle of beer it produces and export to Spain. Thus, Switzerland can gain from trade as long as it receives more than 1/10 barrels of wine for each bottle of beer it exports to Spain.

The price of wine in terms of beer must be between 4 and 10. So it can be

either 6 barrels of beer per bottle of wine or 9 barrels of beer per bottle of wine.