Question

Terms of trade Suppose that Greece and Germany both produce oil and stained glass. Greece's opportunity cost of producing a pane of stained glass is 4 barrels of oil while Germany's opportunity cost of producing a pane of stained glass is 10 barrels of oil. By comparing the opportunity cost of producing stained glass in the two countries, you can tell that (Greece / Germany) has a comparative advantage in the production of stained glass and (Greece / Germany) has a comparative advantage in the production of oil. Suppose that Greece and Germany consider trading stained glass and oil with each other. Greece can gain from specialization and trade as long as it receives more than a. 1 barrel b. 1/10 barrel c. 1/4 barrel d. 4 barrels e. 10 barrels of oil for each pane of stained glass it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than a. 1 pane b. 1/10 pane c. 1/4 pane d. 4 panes e. 10 panes of stained glass for each barrel of oil it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of oil) would allow both Germany and Greece to gain from trade? Check all that apply. 8 barrels of oil per pane of stained glass 2 barrels of oil per pane of stained glass 6 barrels of oil per pane of stained glass 18 barrels of oil per pane of stained glass

Answer 1

Answer:

Greece has a comparative advantage in the production of stained glass.

Germany has a comparative advantage in the production of oil.

Greece can gain from specialization and trade as long as it receives more than 4 barrels of oil.

Germany can gain from trade as long as it receives more than 0.1 pane of stained glass.

Trade price in this situation will be 8 barrels of oil per pane of stained glass and 6 barrels of oil per pane of stained glass.

Explanation:

Greece and Germany both produce oil and stained glass.

Greece's opportunity cost of producing a pane of stained glass

= 4 barrels of oil

Germany's opportunity cost of producing a pane of stained glass

= 10 barrels of oil

Greece has a comparative advantage in the production of stained glass as it has lower opportunity cost.

Greece's opportunity cost of producing a barrel of oil

= $\frac{1}{4}$

= 0.25 pane of stained glass

Germany's opportunity cost of producing a barrel of oil

= $\frac{1}{10}$

= 0.1 pane of stained glass

Germany has a comparative advantage in the production of oil as it has lower opportunity cost.

Greece can gain from specialization and trade as long as it receives more than 4 barrels of oil. Germany can gain from trade as long as it receives more than 0.1 pane of stained glass.

Both the countries will gain from trade if the trade price lies between their opportunity cost. So trade price in this situation will be 8 barrels of oil per pane of stained glass and 6 barrels of oil per pane of stained glass.