Suppose that Italy and Sweden both produce rye and wine. Italy's opportunity cost of producing a bottle of wine is 5 bushels of rye while Sweden's opportunity cost of producing a bottle of wine is 10 bushels of rye. By comparing the opportunity cost of producing wine in the two countries, you can tell that, Italy or Sweden, has a comparitive advantage in the production of wine and, Italy or Sweden, has a comparative advantage in the production of rye.
Suppose that Italy and Sweden consider trading wine and rye with each other. Italy can gain from specialization and trade as long as it receives more than
a. 1 bushel
b. 1/10 bushel
c. 1/5 bushel
d. 5 bushels
e. 10 bushels
of rye for each bottle of wine it exports to Switzerland. Similarly, Sweden can gain from trade as long as it receives more than
a. 1 bottle
b. 1/10 bottle
c. 1/5 bottle
d. 5 bottles
e. 10 bottles
of wine for each bushel of rye 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 rye) would allow both Sweden and Italy to gain from trade?
a. 12 bushels of rye per bottle of wine
b. 1 bushel of rye per bottle of wine
c. 2 bushels of rye per bottle of wine
d. 6 bushels of rye per bottle of wine