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Homework answers / question archive / 6
6. Terms of trade
Suppose that Portugal and Germany both produce jeans and stained glass. Portugal's opportunity cost of producing a pane of stained glass is 3 pairs of jeans, while Germany's opportunity cost of producing a pane of stained glass is 9 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 Portugal and Germany consider trading stained glass and jeans with each other. Portugal can gain from specialization and trade as long as it receives more than ..........? of jeans for each pane of stained glass it exports to Germany. Similarly, Germany can gain from trade as long
as it receives more than .........? of stained glass for each pair of jeans it exports to Portugal.
Based on your answers to the previous question, which of the following terms of trade (that is, price of stained glass in terms of jeans) would allow both Germany and Portugal to gain from trade?
Check all that apply.
O 1 pair of jeans per pane of stained glass
O 2 pairs of jeans per pane of stained glass
O 4 pairs of jeans per pane of stained glass
O 8 pairs of jeans per pane of stained glass
By comparing the opportunity cost of producing stained glass in the two countries, you can tell that Portugal has a comparative advantage in the production of stained glass, and Germany has a comparative advantage in the production of jeans.
Suppose that Portugal and Germany consider trading stained glass and jeans with each other. Portugal can gain from specialization and trade as long as it receives more than 3 pairs of jeans for each pane of stained glass it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than 1/9 pane of stained glass for each pair of jeans it exports to Portugal.
The terms of trade would be greater than 3 and less than 9.
So,
Option C and D are correct.
