Question

Suppose that Spain and Germany consider trading shoes and jeans with each other. Spain can gain from specialization and trade as long as it receives more than_____________ of jeans for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives_______________ more than of shoes for each pair of jeans it exports to Spain.Based on your answer to the last question, which of the following terms of trade (that is, price of shoes in terms of jeans) would allow both Germany and Spain to gain from trade? Check all that apply.
a. 1 pair of jeans per pair of shoes
b. 9 pairs of jeans per pair of shoes
c. 12 pairs of jeans per pair of shoes
d. 6 pairs of jeans per pair of shoes

Answer 1

Answer:

c. 12 pairs of jeans per pair of shoes

Explanation:

Suppose that Spain and Germany both produce jeans and shoes.

Spain's opportunity cost of producing a pair of shoes is 5 pairs of jeans Germany's opportunity cost of producing a pair of shoes is 10 pairs of jeans.

By comparing the opportunity cost of producing shoes in the two countries, you can tell that__Spain__ has a comparative advantage in the production of shoes and _Germany__has a comparative advantage in the production of jeans.

Similarly, Germany can gain from trade as long as it receives more than 10 pair of shoes for each pair of jeans it exports to Spain.

Based on your answer to the last question, which of the following terms of trade (that is, price of shoes in terms of jeans) would allow both Germany and Spain to gain from trade?

c. 12 pairs of jeans per pair of shoes