Assume that you live in a simple economy in which only three goods are produced and traded: cashews, pecans, and almonds. supp
1 answer:
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Answer:
Spain has a comparative advantage in the production of stained glass and Austria has a comparative advantage in the production of fish.
Spain can gain from trade as long as it is getting more than 4 pounds of fish for each pane of stained glass it exports to Austria.
Austria can gain from trade as long as it receives more than 0.1 panes of stained glass for each pound of fish it exports to Spain.
Both the countries can gain from trade if the price of trade is 9 pounds of fish per pane of stained glass or 7 pounds of fish per pane of stained glass.
Explanation:
Spain's opportunity cost of producing a pane of stained glass is
= 4 pounds of fish
Austria's opportunity cost of producing a pane of stained glass is
= 10 pounds of fish
Spain's opportunity cost of producing a pound of fish is
=
= 0.25
Austria's opportunity cost of producing a pound of fish is
=
= 0.1
Spain has a comparative advantage in the production of stained glass as it has lower opportunity costs in its production. Similarly, Austria has a comparative advantage in the production of fish.
Spain can gain from trade as long as it is getting more than 4 pounds of fish for each pane of stained glass it exports to Austria.
Similarly, Austria can gain from trade as long as it receives more than 0.1 panes of stained glass for each pound of fish it exports to Spain.
Both the countries can gain from trade if the price of the trade is 9 pounds of fish per pane of stained glass or 7 pounds of fish per pane of stained glass.
Spain will not accept 1 pound of fish per pane of stained glass as it is not covering opportunity cost. Austria will not pay 16 pounds of fish per pane of stained glass.