Please check to see if my answers are right,only answer IF YOU KNOW Attempts: Av
ID: 1123427 • Letter: P
Question
Please check to see if my answers are right,only answer IF YOU KNOW
Attempts: Average: 13 3. Terms of trade Suppose that Spain and Sweden both produca beer and shoes. Spain's opportunity cost of producing a pair of shoes is 4 barrels of beer while Sweden's opportunity cast of producing a pair of shoes is 10 barrels of beer By comparing the opportunity cost of producing shoes in the two countries, you can tell that s production of shoes and Sweden has a comparative advantage in the production of beer. in has a compara ve advantage in the Suppose that Spain and Sweden consider trading shoes and beer with each other. Spain can gain from specialization and trade as long as it receives more than 4 barrels of beer for each pair of shoes it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than 1 / 10 pair of shoes for each barrel of beer it exports to Spain. Based on your answer to the last question, which of the following terms of trada (that is, price of shoes in terms of beer) would allow both Sweden and Spain to gain from trade? Check all that apply. 16 barrels of beer per pair of shoes 2 barrels of beer per pair of shoes 9 barrels of beer per pair of shoes 7 barrels of beer per pair of shoesExplanation / Answer
A nation has comparative advantage in production of a good when it can produce such good at lower opportunity cost relative to other countries.
In given case, Spain can produce shoes at lower opportunity cost relative to Sweden.
So, Spain has comparative advantage in production of shoes and, in reciprocal, Sweden has comparative advantage in production of beer.
So,
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 Sweden has a comparative advantage in the production of beer.
Spain can produce 1 pair of shoes by scarificing 4 barrels of beer. So, if other country offers it 4 barrels or more for 1 pair of shoes, it will be willing to trade 1 pair of shoes.
On the other hand, Sweden can get 1 barrel of beer by sacrificing 1/10 pair of shoes. So, if another country offers equal to or more than 1/10 pair of shoes, Sweden would exchange 1 barrel of beer.
So,
Spain can gain from specialization and trade as long as it receives more than 4 barrels of beer for each pair of shoes it exports to Sweden. Similarly, Sweden can gain from specialization and trade as long as it receives more than 1/10 pair of shoes for each barrel of beer it exports to Spain.
Based on above explanation, terms of trade represented by option 3 and 4 would allow both Spain and Sweden to gain from trade.
Thus, the correct answer is the option (3) and (4).