Suppose that Portugal and Sweden both produce jeans and shoes. Portugal\'s oppor

Question

Suppose that Portugal and Sweden both produce jeans and shoes. Portugal's opportunity cost of producing a pair of shoes is 5 pairs of jeans while Sweden's opportunity cost of producing a pair of shoes is 10 pairs of jeans.

By comparing the opportunity cost of producing shoes in the two countries, you can tell that has a comparative advantage in the production of shoes and has a comparative advantage in the production of jeans.

Suppose that Portugal and Sweden consider trading shoes and jeans with each other. Portugal can gain from specialization and trade as long as it receives more than of jeans for each pair of shoes it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than of shoes for each pair of jeans it exports to Portugal.

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

6 pairs of jeans per pair of shoes

9 pairs of jeans per pair of shoes

2 pairs of jeans per pair of shoes

1 pair of jeans per pair of shoes

Explanation / Answer

Answer
Q1
Portugal has the comparative advantage in jeans and Sweden have the comparative advantage in shoes, as the opportunity cost of jeans is lower for Portugal.
Q2
The term of trade should be between opportunity cost of both the countries to benefit from the trade so they both trade and benefit if the term of trade is
6 pairs of jeans per pair of shoes
or
9 pairs of jeans per pair of shoes
but do not trade if
2 pairs of jeans per pair of shoes
or
1 pair of jeans per pair of shoes

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