Suppose that Greece and Germany both produce jeans and cheese. Greece\'s opportu
ID: 1222888 • Letter: S
Question
Suppose that Greece and Germany both produce jeans and cheese. Greece's opportunity cost of producing a pound of cheese is 4 pairs of jeans while Germany's opportunity cost of producing a pound of cheese is 9 pairs of jeans. By comparing the opportunity cost of producing cheese in the two countries, you can tell that has a comparative advantage in the production of cheese and has a comparative advantage in the production of jeans. Suppose that Greece and Germany consider trading cheese and jeans with each other. Greece can gain from specialization and trade as long as it receives more than of jeans for each pound of cheese it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than cheese for each pair of jeans it exports to Greece. Based on your answer to the last question, which of the following terms of trade (that is, price of cheese in terms of jeans) would allow both Germany and Greece to gain from trade? Check all that apply. 5 pairs of jeans per pound of cheese 3 pairs of jeans per pound of cheese 1 pair of jeans per pound of cheese 6 pairs of jeans per pound of cheeseExplanation / Answer
a) Greece has a comparative advantage in the production of cheese and Germany has a comparative advantage in the production of jeans
b) Greece can gain from specialization and trade as long as it receives more than: 4 pairs of jeans of for one pound of cheese it exports to Germany.
Germany can gain from trade as long as it receives more than 1/9 pound of cheese it exports to Greece.
c) The terms of trade must lie in between the opportunity costs of the two countries
option (D)- 6 pairs of jeans per pound of cheese.