Suppose that Greece and Switzerland both produce oil and stained glass. Greece's opportunity cost of producing a pane of stained glass is 5 barrels of oil while Switzerland's opportunity cost of producing a pane of stained glass is 10 barrels of oil.
By comparing the opportunity cost of producing stained glass in the two countries, you can tell that (Switzerland/Greece) has a comparative advantage in the production of stained glass and ((Switzerland/Greece) has a comparative advantage in the production of oil.
Suppose that Greece and Switzerland consider trading stained glass and oil with each other. Greece can gain from specialization and trade as long as it receives more than (1 , 1/10 , 1/5 , 5 , 10) barrels of oil for each pane of stained glass it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than (1 , 1/10 , 1/5 , 5 , 10) pane of stained glass for each barrel of oil it exports to Greece.
Based on your answer to the last question, which of the following terms of trade (that is, price of stained glass in terms of oil) would allow both Switzerland and Greece to gain from trade?
a) 1 barrel of oil per pane of stained glass
b) 2 barrels of oil per pane of stained glass
c) 9 barrels of oil per pane of stained glass
d) 6 barrels of oil per pane of stained glass
Answers: 2
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