5. The price of trade Suppose that Italy and Sweden both produce fish and staine

Question

5. The price of trade Suppose that Italy and Sweden both produce fish and stained glass. Italy's opportunity cost of producing a pane of stained glass is 5 pounds of fish while Sweden'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 production of stained glass and has a comparative advantage in the has a comparative advantage in the production of fish. Suppose that Italy and Sweden consider trading stained glass and fish with each other. Italy can gain from specialization and trade as long as it receives more than receives more than of fish for each pane of stained glass it exports to Sweden. Similarly, Sweden can gain from trade as long as it of stained glass for each pound of fish it exports to Italy 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 Sweden and Italy to gain from trade? Check all that apply. 7 pounds of fish per pane of stained glass 4 pounds of fish per pane of stained glass 11 pounds of fish per pane of stained glass 6 pounds of fish per pane of stained glass

Explanation / Answer

Answer 5

As opportunity cost of producing stained glass is lesser for Italy{5 pound of fish} than Sweden{10 pound of fish}, Hence Italy has comparative advantage in Production of Stained Glass and Sweden has comparative advantage in Prdoction of Fish.

Without Trade Italy can Produce 5 pound of fish by sacrificing 1 pane of stained glass while, Hence Italy will gain from trade if for 1 pane of stained glass he gets more than 5 pounds of Fish. Similarly, Sweden can produce 1/10 pain of stained glass by sacrificing 1 pound of Fish. Hence Sweded will gain from trade if for 1 pound of fish he exports, he gets more than 1/10 pane of stained glass.

From above We have the following inequality:

G represents Stained Glass and F represents Fish

Sweden can produce 10 pound by sacrificing 1 pane of Stained Glass, So Sweden will gain from Trade if they can exchange lesser than 10 Fish for 1 Glass Pain. And As discussed above Italy will gain from trade If it gets more than 5 pound of fish for 1 pane of Stained Glass.

Let G represents stained Glass and F Represents Fish. Hence Both will gain from trade If :

5F < G < 10F

Hence the correct asnwers are (a) 7 pounds of Fish per pane of stained glass and (d) 6 pounds of Fish per pane of stained glass

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