Question

Suppose that Spain and Austria both produce fish and stained glass. Spain's opportunity cost of producing a pane of stained glass is 4 pounds of fish while Austria's opportunity cost of producing a pane of stained glass is 10 pounds of fish. By comparing the opportunity cost of producing stained glass in the two countries, you can tell that ____ as a comparative advantage in the production of stained glass and _____ has a comparative advantage in the production of fish. Suppose that Spain and Austria consider trading stained glass and fish with each other. Spain can gain from specialization and trade as long as it receives more than ______ of fish for each pane of stained glass it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than _____ of stained glass 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 stained glass in terms of fish) would allow both Austria and Spain to gain from trade? Check all that apply.

9 pounds of fish per pane of stained glass
7 pounds of fish per pane of stained glass
16 pounds of fish per pane of stained glass
1 pound of fish per pane of stained glass

Answer 1

Answer:

Spain has a comparative advantage in the production of stained glass and Austria has a comparative advantage in the production of fish.

Spain can gain from trade as long as it is getting more than 4 pounds of fish for each pane of stained glass it exports to Austria.

Austria can gain from trade as long as it receives more than 0.1 panes of stained glass for each pound of fish it exports to Spain.

Both the countries can gain from trade if the price of trade is 9 pounds of fish per pane of stained glass  or 7 pounds of fish per pane of stained glass.

Explanation:

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

= 4 pounds of fish

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

= 10 pounds of fish

Spain's opportunity cost of producing a pound of fish is

=$\frac{1}{4}$

= 0.25

Austria's opportunity cost of producing a pound of fish is

= $\frac{1}{10}$

= 0.1

Spain has a comparative advantage in the production of stained glass as it has lower opportunity costs in its production. Similarly, Austria has a comparative advantage in the production of fish.

Spain can gain from trade as long as it is getting more than 4 pounds of fish for each pane of stained glass it exports to Austria.

Similarly, Austria can gain from trade as long as it receives more than 0.1 panes of stained glass for each pound of fish it exports to Spain.

Both the countries can gain from trade if the price of the trade is 9 pounds of fish per pane of stained glass or 7 pounds of fish per pane of stained glass.

Spain will not accept 1 pound of fish per pane of stained glass as it is not covering opportunity cost. Austria will not pay 16 pounds of fish per pane of stained glass.