Question

Suppose that France and Austria both produce jeans and stained glass. France's opportunity cost of producing a pane of stained glass is 3 pairs of jeans while Austria's opportunity cost of producing a pane of stained glass is 11 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 France and Austria consider trading stained glass and jeans with each other. France can gain from specialization and trade as long as it receives more than of jeans for each pane of stained glass it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than of stained glass for each pair of jeans it exports to France.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 Austria and France to gain from trade?

a. 4 pairs of jeans per pane of stained glass
b. 1 pair of jeans per pane of stained glass
c. 11 pairs of jeans per pane of stained glass
d. 7 pairs of jeans per pane of stained glass

Answer 1

By comparing the opportunity cost of producing stained glass in the two countries, you can tell that FRANCE has a comparative advantage in the production of stained glass and AUSTRIA has a comparative advantage in the production of jeans.

France can gain from specialization and trade as long as it receives more than 3 of jeans for each pane of stained glass it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than 1/11 of stained glass for each pair of jeans it exports to France.

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 Austria and France to gain from trade?

• a. 4 pairs of jeans per pane of stained glass
• d. 7 pairs of jeans per pane of stained glass

The price range that allows both countries to gain from trade is more than 3 but less than 11 pairs of jeans per pane of stained glass.