5. The price of trade that Italy and Germany both produce beer and Shoes Italy\'

Question

5. The price of trade that Italy and Germany both produce beer and Shoes Italy's opportunity cost of producing a pair of shoes is 3 barrels of b Germany's opportunity cost of producing a pair of shoes is 11 barrels of beer By comparing the opportunity cost of producing shoes in the two countries, you can tell that production of shoes and has a comparative advantage in the has a comparative advantage in the production of beer. Suppose that Italy and Germany consider trading shoes and beer with each other. Italy can gain from specialization and trade as long as it receives more than of beer for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives more of shoes for each barrel of beer it exports to Italy. than Based on your answer to the last question, which of t and Italy to gain from trade? Check all that apply. he following prices of trade (that is, price of shoes in terms of beer) would allow both Germany 13 barrels of beer per pair of shoes 4 barrels of beer per pair of shoes 2 barrels of beer per pair of shoes 6 barrels of beer per pair of shoes

Explanation / Answer

Opportunity cost is the value of the next best alternative. Italy has a comparative advantage in the production of shoes because its cost of producing a pair of shoes is 3 barrels of beer, whereas, Germany's opportunity cost is 11 barrels of beer. Germany has comparative advantage in the production of beer, since it costs 1/11 of a pair of shoe, whereas, it costs 1/3rd for Italy.

Italy can gain from trade as long as it receives more than 3 barrels of beer and Germany can gain from trade as long as it receives more than 1/11th pair of shoe.

The terms of trade must lie in between the opportunity costs of the two countries

4 barrels of beer per pair of shoes is beneficial to both

6 barrels of beer per pair of shoes is beneficial to both

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