3. Terms of trade Suppose that Spain and Germany both produce jeans and shoes. S

Question

3. Terms of trade

Suppose that Spain and Germany both produce jeans and shoes. Spain's opportunity cost of producing a pair of shoes is 5 pairs of jeans while Germany'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 Spain and Germany consider trading shoes and jeans with each other. Spain can gain from specialization and trade as long as it receives more than_____________ of jeans for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives_______________ more than of shoes for each pair of jeans it exports to Spain.Based on your answer to the last question, which of the following terms of trade (that is, price of shoes in terms of jeans) would allow both Germany and Spain to gain from trade? Check all that apply.

1 pair of jeans per pair of shoes

9 pairs of jeans per pair of shoes

12 pairs of jeans per pair of shoes

6 pairs of jeans per pair of shoes

Explanation / Answer

Suppose that Spain and Germany both produce jeans and shoes. Spain's opportunity cost of producing a pair of shoes is 5 pairs of jeans while Germany'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_Spain__________ has a comparative advantage in the production of shoes and Germany_______________has a comparative advantage in the production of jeans.

Suppose that Spain and Germany consider trading shoes and jeans with each other. Spain can gain from specialization and trade as long as it receives more than_5____________ of jeans for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives 1/10_______________ more than of shoes for each pair of jeans it exports to Spain.Based on your answer to the last question, which of the following terms of trade (that is, price of shoes in terms of jeans) would allow both Germany and Spain to gain from trade? Check all that apply.

9 pairs of jeans per pair of shoes

6 pairs of jeans per pair of shoes

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