Question

The basis of trade

Suppose that Italy and Spain both produce cheese and wine. Italy's opportunity cost of producing a bottle of wine is 2 pounds of cheese. That is, Italy forgoes the production of 2 pounds of cheese when it produces a bottle of wine. Spain's opportunity cost of producing a bottle of wine is 4 pounds of cheese.
______ a comparative advantage in the production of wine.
______ a comparative advantage in the production of cheese.

Answer 1

• Italy has a comparative advantage in the production of wine.

• Spain has a comparative advantage in the production of cheese.

Step-by-step explanation:

Comparative advantage is when a particular economy has a lower opportunity cost when it produces goods and seevices than its trading partners.

For Italy, the country forgoes the production of 2 pounds of cheese when it produces a bottle of wine while Spain forgoes 4 pounds of cheese.

The above statement simply means that Italy has a comparative advantage in the production of wine and Spain has a comparative advantage in the production of cheese.