Question

Suppose that Greece and Switzerland both produce beer and stained glass. Greece's opportunity cost of producing a pane of stained glass is 4 barrels of beer while Switzerland's opportunity cost of producing a pane of stained glass is 8 barrels of beer. 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 beer. Suppose that Greece and Switzerland consider trading stained glass and beer with each other. Greece can gain from specialization and trade as long as it receives more than of beer for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than of stained glass for each barrel of beer it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of beer) would allow both Switzerland and Greece to gain from trade? Check all that apply. 5 barrels of beer per pane of stained glass 7 barrels of beer per pane of stained glass 1 barrel of beer per pane of stained glass 20 barrels of beer per pane of stained glass

Answer 1

Explanation:

Greece's opportunity cost of producing a pane of stained glass is

= 4 barrels of beer

Switzerland's opportunity cost of producing a pane of stained glass is

= 8 barrels of beer

Greece's opportunity cost of producing a barrel of beer is

= $\frac{1}{4}$

= 0.25 panes of stained glass

Switzerland's opportunity cost of producing a barrel of beer is

= $\frac{1}{8}$

= 0.125 panes of stained glass

A country is said to be having a comparative advantage in the production of a commodity if it has a relatively lower opportunity cost of production.

Here, Greece has a lower opportunity cost of producing stained glass, so it has a comparative advantage in producing glass.

Similarly, Switzerland has a lower opportunity cost of producing a barrel of beer so it has a comparative advantage in producing beer.

Greece can gain from trade as long as it is getting more than 4 barrels of beer for a pane of stained glass.

While Switzerland can gain from trade as long as it is getting more than 0.125 panes of stained glass for a barrel of beer.

Both will gain from trade if the price of the trade is 5 barrels of beer per pane of stained glass and 7 barrels of beer per pane of stained glass.

Greece will not accept 1 barrel of beer per pane of stained glass and Switzerland will not pay 20 barrels of beer per pane of stained glass.