Answered: Suppose that Italy and Switzerland both…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter17: International Trade

Section: Chapter Questions

Problem 1.2P

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5. The price of trade

Suppose that Italy and Switzerland both produce beer and wine. Italy's opportunity cost of producing a bottle of wine is 4 barrels of beer while Switzerland's opportunity cost of producing a bottle of wine is 10 barrels of beer.

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 beer.

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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