Question

Suppose that Italy and Sweden both produce jeans and stained glass. Italy's opportunity cost of producing a pane of stained glass is 4 pairs of jeans while Sweden's opportunity cost of producing a pane of stained glass is 10 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 Italy and Sweden consider trading stained glass and jeans with each other. Italy can gain from specialization and trade as long as it receives more than of jeans for each pane of stained glass it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than of stained glass for each pair of jeans it exports to Italy. Based on your answer to the last question, which of the following terms of trade (that is, price of stained glass in terms of jeans) would allow both Sweden and Italy to gain from trade? Check all that apply.1. 18 pairs of jeans per pane of stained glass 2. 2 pairs of jeans per pane of stained glass3. 8 pairs of jeans per pane of stained glass 4. 1 pair of jeans per pane of stained glass

Answer 1

Answer:

Based on the answer to the question, the only one of the given terms of trade (that is, price of stained glass in terms of jeans) that would allow both Sweden and Italy to gain from trade is 8 pairs of jeans per pane of stained glass because 8 pairs is more than 4 pairs, which will be attractive to ITALY and is less than 10 pairs which is a cheaper cost for SWEDEN.

Explanation:

1. Italy's opportunity cost of producing a pane of stained glass is 4 pairs of jeans while Sweden's opportunity cost of producing a pane of stained glass is 10 pairs of jeans

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

3. Suppose that Italy and Sweden consider trading stained glass and jeans with each other. Italy can gain from specialization and trade as long as it receives more than 4 Pairs of jeans for each pane of stained glass it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than 0.1 pair of stained glass for each pair of jeans it exports to Italy.

4.Based on the answer to the last question, the only one of the given terms of trade (that is, price of stained glass in terms of jeans) that would allow both Sweden and Italy to gain from trade is 8 pairs of jeans per pane of stained glass because 8 pairs is more than 4 pairs, which will be attractive to ITALY and is less than 10 pairs which is a cheaper cost for SWEDEN.