5. The price of trade

Suppose that Spain and Switzerland both produce jeans and wine. Spain's opportunity cost of producing a bottle of wine is 3 pairs of jeans while Switzerland's opportunity cost of producing a bottle of wine is 11 pairs of jeans.

By comparing the opportunity cost of producing wine in the two countries, you can tell that has a comparative advantage in the production of wine and has a comparative advantage in the production of jeans.

Suppose that Spain and Switzerland consider trading wine and jeans with each other. Spain can gain from specialization and trade as long as it receives more than of jeans for each bottle of wine it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than of wine for each pair of jeans it exports to Spain.

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 Switzerland and Spain to gain from trade?Check all that apply.

13 pairs of jeans per bottle of wine

1 pair of jeans per bottle of wine

7 pairs of jeans per bottle of wine

10 pairs of jeans per bottle of wine

2. Comparative and absolute advantage

Hubert and Kate are farmers. Each one owns an 18-acre plot of land. The following table shows the amount of corn and rye each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing corn or rye or to produce corn on some of the land and rye on the rest.

	Corn	Rye
(Bushels per acre)	(Bushels per acre)
Hubert	15	3
Kate	20	10

On the following graph, use the blue line (circle symbol) to plot Hubert's production possibilities frontier (PPF), and use the purple line (diamond symbol) to plot Kate's PPF.

_____has an absolute advantage in the production of corn, and _______has an absolute advantage in the production of rye.

Hubert's opportunity cost of producing 1 bushel of rye is ______

bushels of corn, whereas Kate's opportunity cost of producing 1 bushel of rye is _____

bushels of corn. Because Hubert has a______opportunity cost of producing rye than Kate,______has a comparative advantage in the production of rye, and _____has a comparative advantage in the production of corn.