Question

The price of trade Suppose that Italy and Sweden both produce beer and cheese. Italy's opportunity cost of producing a pound of cheese is 4 barrels of beer while Sweden's opportunity cost of producing a pound of cheese is 10 barrels of beer. By comparing the opportunity cost of producing cheese in the two countries, you can tell that has a comparative advantage in the production of cheese and has a comparative advantage in the production of beer. Suppose that Italy and Sweden consider trading cheese and beer with each other. Italy can gain from specialization and trade as long as it receives more than of beer for each pound of cheese it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than of cheese for each barrel of beer it exports to Italy. Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of beer) would allow both Sweden and Italy to gain from trade?

a. 4 barrels of beer per pound of cheese
b. 7 barrels of beer per pound of cheese
c. 6 barrels of beer per pound of cheese
d. 1 barrel of beer per pound of cheese

Answer 1

Italy has Comparative advantage is producing cheeses.

Sweden has comparative advantage of producing barrels of beer.

Italy can gain from trade if it receives more than 1 pound of cheese for every 4 barrels of beer.

Sweden can gain from trade if it receives more than a pound of cheese for every 10 barrels of beer.

The best price for trade is 4 barrels of beer per pound of cheese.

Step-by-step explanation:

Both the countries Sweden and Italy can gain from the trade if they trade for a price of 4 barrels of beer per pound of cheese. The Sweden has comparative advantage in producing barrels of beer and Italy has comparative advantage in producing cheese.