Question

Suppose that Spain and Denmark both produce rye and stained glass. Spain's opportunity cost of producing a pane of stained glass is 4 bushels of rye while Denmark's opportunity cost of producing a pane of stained glass is 10 bushels of rye.
By comparing the opportunity cost of producing wine in the two countries, you can tell that ___________ has a comparative advantage in the production of wine and___________ has a comparative advantage in the production of rye.

Suppose that Spain and Denmark consider trading wine and rye with each other. Spain can gain from specialization and trade as long as it receives more than_________ of rye for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than__________ of wine for each bushel of rye it exports to Spain.

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

a. 1 bushel of rye per bottle of wine
b. 8 bushels of rye per bottle of wine
c. 9 bushels of rye per bottle of wine
d. 3 bushels of rye per bottle of wine

Answer 1

Answer:

By comparing the opportunity cost of producing wine in the two countries, you can tell that SPAIN has a comparative advantage in the production of wine and DENMARK has a comparative advantage in the production of rye.

Suppose that Spain and Denmark consider trading wine and rye with each other. Spain can gain from specialization and trade as long as it receives more than 4 bushels of rye for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than 1/10  of wine for each bushel of rye it exports to Spain.

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

• b. 8 bushels of rye per bottle of wine
• c. 9 bushels of rye per bottle of wine

Explanation:

Spain

wine = 4 bushels of rye

bushels of rye = 1/4 wine

Denmark

wine = 10 bushels of rye

bushels of rye = 1/10 wine