The price of trade

Question

Suppose that France and Sweden both produce beer and stained glass. France's opportunity cost of producing a pane of stained glass is 4 barrels of beer while Sweden's opportunity cost of producing a pane of stained glass is 10 barrels of beer.

By comparing the opportunity cost of producing stained glass in the two countries, you can tell that  blank  has a comparative advantage in the production of stained glass and blank   has a comparative advantage in the production of beer.

Suppose that France and Sweden consider trading stained glass and beer with each other. France can gain from specialization and trade as long as it receives more than   blank  of beer for each pane of stained glass it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than  blank  of stained glass for each barrel of beer it exports to France.

Based on your answer to the last question, which of the following prices of trade (that is, price of stained glass in terms of beer) would allow both Sweden and France to gain from trade? Check all that apply.

7 barrels of beer per pane of stained glass

9 barrels of beer per pane of stained glass

16 barrels of beer per pane of stained glass

2 barrels of beer per pane of stained glass

Answer 1

France Sweden

1 glass = 4 beer 1 glass = 10 beer

This is a discussion of opportunity cost. Assuming both countries have the same time to produce the products in question, this can visualized and discussed using time as a constant.

In a day, France can make either 1 glass or 4 beers

In the same timeframe, Sweden can make either 1 glass or 10 beers

Which means Sweden is 10/4 or 2.5 times more efficient in producing beers.

France can specialize and benefit from trade if it can produce more than 2.5 glass for every 1 beer.

Sweden can specialize and benefit from trade if it specializes in beer and receives more than 4/10 = 0.4 beers per every 1 stained glass.

Therefore, the answers that would allow for a profitable trade agreement in this scenario would be

7 barrels of beer from Sweden for 1 pane of stained glass from France

9 barrels of beer from Sweden for 1 pane of stained glass from France

16 barrels of beer from Sweden for 1 pane of stained glass from France

NOT 2 barrels of beer from Sweden for 1 pane of stained glass from France because Sweden wouldn't benefit from the exchange in resources.