Cal state fullerton

Econ 335

5 . Terms of trade

Suppose that Italy and Austria both produce fish and shoes. Italy's opportunity cost of producing a pair of shoes is 3 pounds of fish, while Austria's opportunity cost of producing a pair of shoes is 9 pounds of fish.

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------------- has a comparative advantage in the production of fish.

Suppose that Italy and Austria consider trading shoes and fish with each other. Italy can gain from specialization and trade as long as it receives more than--------------- of fish for each pair of shoes it exports to Austria. Similarly, Austria can gain from trade as long as it receives more than---------- of shoes for each pound of fish it exports to Italy.

Based on your answers to the previous question, which of the following terms of trade (that is, price of shoes in terms of fish) would allow both Austria and Italy to gain from trade?Check all that apply.

4 pounds of fish per pair of shoes

2 pounds of fish per pair of shoes

1 pound of fish per pair of shoes

17 pounds of fish per pair of shoes