Reference no: EM13999887
Suppose that Italy and Germany both produce fish and wine. Italy's opportunity cost of producing a bottle of wine is 4 pounds of fish while Germany's opportunity cost of producing a bottle of wine is 9 pounds of fish.
By comparing the opportunity cost of producing wine in the two countries, you can tell that (Italy, Germany) has a comparative advantage in the production of wine and (Italy, Germany) has a comparative advantage in the production of fish.
Suppose that Italy and Germany consider trading wine and fish with each other. Italy can gain from specialization and trade as long as it receives more than (1, 1/4, 1/9, 4, 9 bottles) of fish for each bottle of wine it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than (1, 1/4, 1/9, 4, 9 bottles) of wine for each pound of fish it exports to Italy.
Based on your answer to the last question, which of the following terms of trade (that is, price of wine in terms of fish) would allow both Germany and Italy to gain from trade? Check all that apply.
13 pounds of fish per bottle of wine
1 pound of fish per bottle of wine
7 pounds of fish per bottle of wine
6 pounds of fish per bottle of wine
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