Question

Suppose that Spain and Sweden both produce fish and wine. Spain's opportunity cost of producing a bottle of wine is 4 pounds of fish while Sweden's opportunity cost of producing a bottle of wine is 10 pounds of fish.
By comparing the opportunity cost of producing wine in the two countries, you can tell that ( spain or sweden ) has a comparative advantage in the production of wine and ( spain or sweden ) has a comparative advantage in the production of fish.

Suppose that Spain and Sweden consider trading wine and fish with each other. Spain can gain from specialization and trade as long as it receives more than (1 or 1/10 or 1/4 or 4 or 10 pounds ) of fish for each bottle of wine it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than (1 or 1/10 or 1/4 or 4 or 10 bottles ) of wine for each pound of fish it exports to Spain.

Based on your answer to the last question, which of the following prices of trade (that is, price of wine in terms of fish) would allow both Sweden and Spain to gain from trade? Check all that apply.

A) 9 pounds of fish per bottle of wine

B) 1 pound of fish per bottle of wine

C) 16 pounds of fish per bottle of wine

D) 2 pounds of fish per bottle of wine

Answer 1

Answer:

A) 9 Pounds of Fish Per Bottle of Wine

Explanation:

A few things should be explained

1. Opportunity Cost - this is the benefit or value of the next best choice that has to be sacrificed when a choice is made between several alternatives.

2. Comparative Advantage: This describes the advantage when a business, individual or even a nation is able to maunfacture a good or offer a service at an opportunity cost that is lower than other competitors in the business. It simply means the ability to produce a good or service at a cost cheaper than one's competitors.

Step 1: By comparing the opportunity cost of producing wine in the two countries, you can tell that Spain (ability to produce a bottle for 4 pounds of fish as compard to 10 pounds by Sweden) has a comparative advantage in the production of wine

Also Comparing the opportunity cost of wine as well, Sweden has the comparative advantage in the production of fish (10 pounds of fish as compared to 3 pounds that can be produced by Spain for a bottle of while).

Step 2: The Trading of wine and fish between Spain and Sweden

a) as long as Spain is able to get more than 4 pounds of fish (what it can produce) for every exported bottle of wine, then it can gain from a trade with Sweden.

b) Also , as long as Sweden is able to receive more than 1/10 bottles of wine for each pound of fish it exports to Spain, it can gain from the specialization and trade.

Step 3: Prices of trade (of wine in terms of fish) will allow both Sweden and Spain gain from Trade.

The correct answer is 9 Pounds of Fish per bottle of Wine. This is correct because Spain can get more than the minimum 4 pounds of fish it needs and Sweden can receive more than 1/10 the bottles of wine it needs to make a gain.