5. The price of trade Suppose that Portugal and Switzerland both produce fish and stained glass....

5. The price of trade

Suppose that Portugal and Switzerland both produce fish and stained glass. Portugal's opportunity cost of producing a pane of stained glass is 5 pounds of fish while Switzerland'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 ______ has a comparative advantage in the production of stained glass and ______ has a comparative advantage in the production of fish.

Suppose that Portugal and Switzerland consider trading stained glass and fish with each other. Portugal can gain from specialization and trade as long as it receives more than ______ pounds of fish for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than _____ pane of stained glass for each pound of fish it exports to Portugal.

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 Switzerland and Portugal to gain from trade? Check all that apply.

A. 1 pound of fish per pane of stained glass

B. 2 pounds of fish per pane of stained glass

C. 12 pounds of fish per pane of stained glass

D. 9 pounds of fish per pane of stained glass

Expert Solution

Rahul Sunny answered 2 years ago

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