Question

Suppose that Spain and Sweden both produce fish and wine. Spain's opportunity cost of producing a bottle of wine is 4 pounds of fish while Sweden's opportunity cost of producing a bottle of wine is 10 pounds of fish.

By comparing the opportunity cost of producing wine in the two countries, you can tell that ( spain or sweden ) has a comparative advantage in the production of wine and ( spain or sweden ) has a comparative advantage in the production of fish.

Suppose that Spain and Sweden consider trading wine and fish with each other. Spain can gain from specialization and trade as long as it receives more than (1 or 1/10 or 1/4 or 4 or 10 pounds ) of fish for each bottle of wine it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than (1 or 1/10 or 1/4 or 4 or 10 bottles ) of wine for each pound of fish it exports to Spain.

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

A) 9 pounds of fish per bottle of wine

B) 1 pound of fish per bottle of wine

C) 16 pounds of fish per bottle of wine

D) 2 pounds of fish per bottle of wine

Answer 1

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 (lower opportunity cost in terms of fish production) and Sweden has a comparative advantage in the production of fish.

Suppose that Spain and Sweden consider trading wine and fish with each other. Spain can gain from specialization and trade as long as it receives more than 4 pounds of fish for each bottle of wine it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than 1/10 bottles of wine for each pound of fish it exports to Spain.

Correct options:

- 9 pounds of fish per bottle of wine