Suppose that Switzerland and Portugal both produce oil and stained glass. Switze
ID: 1207330 • Letter: S
Question
Suppose that Switzerland and Portugal both produce oil and stained glass. Switzerland's opportunity cost of producing a pane of stained glass is 7 barrels of oil, while Portugal's opportunity cost of producing a pane of stained glass is 3 barrels of oil. By comparing the opportunity costs of producing stained glass in the two countries, you can determine that_____has a comparative advantage in the production of stained glass and_____has a comparative advantage in the production of oil. Suppose that Portugal and Switzerland consider trading stained glass and oil with each other. Portugal can gain from specialization and trade as long as it receives more than_____of oil for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from specialization and trade as long as it receives more than_____of stained glass for each barrel of oil it exports to Portugal. Based on your answer to the last question, which of the following terms of trade (meaning the price of stained glass in terms of oil) would allow both Switzerland and Portugal to gain from specialization and trade? Check all that apply.Explanation / Answer
By comparing the opportunity cost of production stained glass in th two countries, you can determine that Switzerland has a comparative advantage in the production of stained glass and Portugal has a comparative advantage in the production of oil.
Suppose that Portugal and Switzerland consider trading stained glass and oil with each other. Portugal can gain from specialisation and trade as long as it receives more than 1/7 barrel of oil for each pain of stained glass it exports to Switzerland.
Similarly, Switzerland can gain from specialisation and trade as long as it receives more than 1/3 of stained glass from each barrel of oil it exports to Portugal.
The trade would allow both Switzerland and Portugal toga from specialisation and trade 1 barrel of oil per pane of stained glass.