5. The price of trade Suppose that Greece and Sweden both produce fish and shoes

Question

5. The price of trade Suppose that Greece and Sweden both produce fish and shoes. Greece's opportunity cost of producing a pair of shoes is 5 pounds of fish while Sweden's opportunity cost of producing a pair of shoes is 10 pounds of fish. 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 fish. Suppose that Greece and Sweden consider trading shoes and fish with each other. Greece can gain from specialization and trade as long as it receives more tharn tari of fish for each pair of shoes it exports to Sweden. Simlarly, Sweden can gain from trade as long as it receives more of shoes for each pound of fish it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of shoes in terms of fish) would allow both Sweden and Greece to gain from trade? Check all that apply. 8 pounds of fish per pair of shoes 1 pound of fish per pair of shoes 15 pounds of fish per pair of shoes 3 pounds of fish per pair of shoes

Explanation / Answer

A) Greece has comparative advantage in production of shoes.

As its opportunity cost of producing shoes is less than that of Sweden's.

B) Sweden has a comparative advantage in the production of fish.

C) 5pound of fish for each pair of shoes it exports to sweden.

As, the trade has to be more than that of its opportunity cost of production.

D) 1/10 pair of shoes for each pound of fish it exports to greece.

8pound of fish per pair of shoes

15pounds of fish per pair of shoes.

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