Reading 16: Trading with the World

LOS a: Discuss opportunity cost associated with trade, how countries can gain from international trade, how countries determine whether to import, export, or produce goods and services, and explain the gains of trade for all parties

1.Which of the following statements is most accurate?

A)   Both countries would gain if Germany traded beer for Holland's cheese.

B)   Both countries would gain if Germany traded cheese for Holland's beer.

C)   Neither country would gain from trade.

D)   Germany would not gain from trade, because it has an absolute advantage in the production of both goods.

The correct answer was A)

Germany has an absolute advantage in both beer and cheese because it can produce more of both than Holland. Holland has a comparative advantage in producing cheese because it can produce either 4 cheeses or 6 beers, which is a ratio of 2 to 3, whereas Germany can produce 5 cheeses or 10 beers, which is a ratio of 1 to 2. Because of Holland's comparative advantage in producing cheese, both countries would benefit if Germany used its absolute advantage in producing beer in exchange for Holland's comparative advantage in cheese.