Question

The price of trade Suppose that Greece and Austria both produce jeans and wine. Greece's opportunity cost of producing a bottle of wine is 3 pairs of jeans while Austria's opportunity cost of producing a bottle of wine is 11 pairs of jeans. By comparing the opportunity cost of producing wine in the two countries, you can tell that production of wine and ______ has a comparative advantage in the has a comparative advantage in the production of jeans Suppose that Greece and Austria consider trading wine and jeans with each other. Greece can gain from specialization and trade as long as it receives more than _______ of jeans for each bottle of wine it exports to Austria. Similarly, Austria can gain from trade as long as t receives more than ________ of wine for each pair of jeans it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of wine in terms of jeans) would allow both Austria and Greece to gain from trade? a) 13 pairs of jeans per bottle of wine b) 6 pairs of jeans per bottle of wine c) 2 pairs of jeans per bottle of wine d) 1 pair of jeans per bottle of wine

Answer 1

(1). Greece has comparative advantage in wine while Austria has comparative advantage in jeans.

(2). Greece can gain from specialization as long as it gets more than 5 pair of jeans per bottle of wine.

Austria can gain from specialization as long as it gets more than 1/11 bottle of wine per pair of jeans.

(3). Trade is mutually beneficial as long as terms of trade lies in between opportunity costs in both countries.

Step-by-step explanation:

So, for the first gap in the question, it can be filled as follows;

(1). Greece has comparative advantage in wine while Austria has comparative advantage in jeans.

Reason: this is because of the lower opportunity cost in Greece for wine will make the country have a comparative advantage in wine.

(2). Greece can gain from specialization as long as it gets more than 5 pair of jeans per bottle of wine.

Austria can gain from specialization as long as it gets more than 1/11 bottle of wine per pair of jeans.

(3). Trade is mutually beneficial as long as terms of trade lies in between opportunity costs in both countries.

3 jeans < TOT < 11 jeans

So, the permissible terms of trade are:

Between 4 pairs of jeans to 10 pairs of jeans.

Answer 2

Answer: The answers are given below

Step-by-step explanation:

a. Greece has a comparative advantage in the production of wine because Greece has a lower opportunity cost of wine and, therefore Austria has a comparative advantage in the production of jeans.

(b) Greece can gain from the specialization as long as Greece gets more than 3 pair of jeans per bottle of wine and Austria can gain from the specialization as long as it gets more than 0.09 (= 1/11) bottle of wine per a pair of jeans.

(c) Trade is mutually beneficial when terms of trade lies in between the opportunity costs in both countries.

3 jeans < TOT < 11 jeans

So, the permissible terms of trade are:

6 pairs of jeans