5. The price of trade Suppose that Italy and Germany both produce jeans and shoes. Italy'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 v has a comparative advantage in the production of jeans. Suppose that Italy and Germany consider trading shoes and jeans with each other. Italy can gain from specialization and trade as long as it receives more than v of jeans for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than v of shoes for each pair of jeans it exports to Italy.

5. The price of trade Suppose that Italy and Germany both produce jeans and shoes. Italy'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 v has a comparative advantage in the production of jeans. Suppose that Italy and Germany consider trading shoes and jeans with each other. Italy can gain from specialization and trade as long as it receives more than v of jeans for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than v of shoes for each pair of jeans it exports to Italy.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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