Question

Suppose that Portugal and Sweden both produce rye and shoes. Portugal's opportunity cost of producing a pair of shoes is 3 bushels of rye while Sweden's opportunity cost of producing a pair of shoes is 11 bushels of rye.
By comparing the opportunity cost of producing shoes in the two countries, you can tell that

Portugal

Sweden

___________has a comparative advantage in the production of shoes and selector 2

Portugal

Sweden

_____________has a comparative advantage in the production of rye.

Suppose that Portugal and Sweden consider trading shoes and rye with each other. Portugal can gain from specialization and trade as long as it receives more than selector 1

1 bushel

1/11 bushel

1/3 bushel

3 bushels

11 bushels

1/11 bushell

Similarly, Sweden can gain from trade as long as it receives more than _____ of shoes for each bushel of rye it exports to Portugal

1/11 pair

1/3 pair

3 pairs

11 pairs

1 pair

1/11 pair

Answer to the last question, which of the following prices of trade (that is, price of shoes in terms of rye) would allow both Sweden and Portugal to gain from trade? Check all that apply. (TWO OUT OF FOUR APPLY)

7 bushels of rye per pair of shoes

10 bushels of rye per pair of shoes

2 bushels of rye per pair of shoes
1 bushel of rye per pair of shoes in terms of rye) would allow both Sweden and Portugal to gain from trade

Answer 1

Answer:

• Portugal : Shoes Opportunity Cost ; Sweden : Rye Opportunity Cost
• Trade gainful if :  Portugal gets > 3 rye per shoes; Sweden gets > 1/11 shoes per rye
• Gainful Terms of Trade : '7 ryes per per shoes', 10 ryes per shoes'.

Explanation:

                  Shoes      Rye      Trade off Ratio (Rye:Shoes )

Portugal      1               3            1:3 or 0.33:1       (1/3 = 0.33)

Sweden       1              11            1:11 or 0.09:1     (1/11= 0.09)

Portugal & Sweden have less opportunity cost & hence comparative advantage than each other, in shoes & rye respectively. Portugal will export shoes to Sweden (importer). Sweden will export rye to Portugal (Importer). Trade will be gainful if they get exchange ratio better than domestic exchange ratio - Portugal gets more than 3 ryes per shoes, Sweden gets more than 1/11 shoes per rye.

'2 ryes per shoes' & '1 rye per shoes' : are not gainful trade ratios for Portugal, as it is getting more i.e 3 ryes per shoes at its own domestic ratio.

'7 ryes per per shoes'  is gaining trade ratio for:

• Portugal: As it gets 7 i.e more than 3 ryes per shoes.
• Sweden : As it gets 0.14 = (1/7) i.e more than 0.09 ryes per shoes

'10 ryes per shoes' is gaining trade ratio for:

• Portugal : As it gets 10 i.e more than 3 pairs of ryes per shoes
• Sweden : As it gets 0.10 = (1/10) i.e more than 0.09 ryes per shoes