Q Search this course Homework (Ch 03) Attempts: Do No Harm:13 5. The price of tr
ID: 1138183 • Letter: Q
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Q Search this course Homework (Ch 03) Attempts: Do No Harm:13 5. The price of trade Suppose that Portugal and Germany both produce jeans and wine. Portugal's opportunity cost of producing a botle of wine is 5 pairs of jeans while Germany's opportunity cost of producing a bottle of wine is 10 pairs of jeans. By comparing the opportunity cost of producing wine in the two countries, you can tell that Portugal has a comparative a production of wine and Germany has a comparative advantage in the production of jeans. and Germany consider trading wine and jeans with each other. Portugal can gain from specialization and trade as long as it rs of jeans for each bottle of wine it exports to Germany. Similarly, Germany can gain from trade as long as it Suppose that Portugal receives more than 1/10 bottle of wine for each pair of jeans it exports to Portugal. Based on your answer to the last question, which of the following prices of trade (that is, price of wine in terms of jeans) would allow both Germany and Portugal to gain from trade? Check all that apply. O 3 pairs of jeans per bottle of wine O 9 pairs of jeans per bottle of wine O 15 pairs of jeans per bottle of wine O 1 pair of jeans per bottle of wine Grade it NowExplanation / Answer
By comparing the opportunity cost of producing wine in the two countries , we can tell that Portugal has a comparative advantage in the production of wine because it has a lower opportunity for producing wine i.e 5 pair of jeans .And Germany has a comparative advantage in the production of jeans because it has a lower opportunity cost for producing jeans i.e 1/10= 0.1 bottle of wine.
Suppose that Portugal and Germany consider trading wine and jeans with each other . Portugal can gain from specialization and trade as long as it receives more than 5 pairs of jeans (which is the opportunity cost of Portugal for producing wine), for each bottle of wine it exports to Germany . Similarly, Germany can gain from trade as long as it receives more than 1/10 bottle of wine (which is the ooportunity cost of Germany for producing jeans) ,for each pair of jean it exports to Portugal.
The price of wine in terms of jeans i.e term of trade would be such that it lies between 5 pairs of jeans per bottle of wine and 10 pairs of jeans per bottle of wine , then it would gain both Portugal and Germany.
Hence, Option(B) i.e 9 pairs of jeans per bottle of wine is correct.
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