Answered: Suppose that Ireland and Norway both…

Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781305971509

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter3: Interdependence And The Gains Rrom Trade

Section: Chapter Questions

Problem 5PA

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5. The price of trade

Suppose that Ireland and Norway both produce boots and shoes. Ireland's opportunity cost of producing a pair of shoes is 4 pairs of boots while Norway's opportunity cost of producing a pair of shoes is 11 pairs of boots.

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 boots.

Suppose that Ireland and Norway consider trading shoes and boots with each other. Ireland can gain from specialization and trade as long as it receives more than of boots for each pair of shoes it exports to Norway. Similarly, Norway can gain from trade as long as it receives more than of shoes for each pair of boots it exports to Ireland.

Based on your answer to the last question, which of the following prices of trade (that is, price of shoes in terms of boots) would allow both Norway and Ireland to gain from trade? Check all that apply.

8 pairs of boots per pair of shoes

3 pairs of boots per pair of shoes

16 pairs of boots per pair of shoes

6 pairs of boots per pair of shoes

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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