Suppose that france and sweden both produce oil and shoes. france's opportunity cost of producing pair of shoes is 4 barrels of oil, while sweden's opportunity cost of producing a pair of shoes is 8 barrels of oil. 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 oil. suppose that france and sweden consider trading shoes and oil with each other. france can gain from specialization and trade as long as it receives more than of oil for each pair of shoes it exports to sweden. similarly, sweden can gain from trade as long as it receives more than of shoes for each barrel of oil it exports to france. based on your answer to the last question, which of the following terms of trade (that is, price of shoes in terms of oil) would allow both sweden and france to gain from trade? check all that apply. 3 barrels of oil per pair of shoes 1 barrel of oil per pair of shoes 5 barrels of oil per pair of shoes 9 barrels of oil per pair of shoes

Explanation:

France's opportunity cost of producing a pair of shoes is

= 4 barrels of oil

Sweden's opportunity cost of producing a pair of shoes is

= 8 barrels of oil

France's opportunity cost of producing a barrel of oil is

=

= 0.25 pairs of shoes

Sweden's opportunity cost of producing a barrel of oil is

=

= 0.125 pairs of shoes

A country is considered to be having a comparative advantage in producing a good if it can produce it at a lower opportunity cost as compared to the other country.

Here, France has a lower opportunity cost of producing shoes. So we can say that it has a comparative advantage in making shoes.

Sweden has a lower opportunity cost in producing oil so it has a comparative advantage in making oil.

France can gain from trade if it gets more than 4 barrels of oil for a pair of shoes. While Sweden can gain from trade if it gets more than 0.125 pairs of shoes for a barrel of oil.

The price for trade to happen should be 5 barrels of oil per pair of shoes as France want more than 4 barrels of oil which is its opportunity cost.

9 barrels of shoes is more than Sweden's opportunity cost of producing a pair of shoes, so Sweden will not be willing to pay it.

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