3. Terms of trade Suppose that France and Denmark both produce jeans and wine. F
ID: 1129124 • Letter: 3
Question
3. Terms of trade Suppose that France and Denmark both produce jeans and wine. France's opportunity cost of producing a bottle of wine is 5 pairs of jeans while Denmark's opportunity cost of producing a bottle of wine is 10 pairs of jeans. has a comparative advantage in the By comparing the opportunity cost of producing wine in the two countries, you can tell that production of wine and has a comparative advantage in the production of jeans. Suppose that France and Denmark consider trading wine and jeans with each other. France can gain from specialization and trade as long as it receives more than receives more than of jeans for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it of wine for each pair of jeans it exports to France. Based on your answer to the last question, which of the following terms of trade (that is, price of wine in terms of jeans) would allow both Denmark and France to gain from trade? Check all that apply. 3 pairs of jeans per bottle of wine 1 pair of jeans per bottle of wine 15 pairs of jeans per bottle of wine 9 pairs of jeans per bottle of wineExplanation / Answer
Answer : By comparing the opportunity cost of producing wine in the two countries, you can tell that France has a comparative advantage in the production of wine and Denmark has a comparative advantage in the production of jeans.
France can gain from specialization and trade as long as it receives more than import of jeans for each bottle of wine it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than import of wine for each pair of jeans it exports to France.
Based on the last question it is clear that gains from trade for both countries is
1pair of jeans per bottle of wine.
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