Suppose that without specialization, iran produces 4 barrels of oil and 6 bottles of olive oil, and iraq produces 4 barrels of oil and 4 bottles of olive oil (in millions per day). are the countries better off or worse off with specialization and trade? suppose that the terms of trade with specialization are 4 barrels of oil for 4.3 bottles of olive oil, and that 4 barrels of oil are indeed traded for 4.3 bottles of olive oil. with specialization and trade, how many additional barrels of olive oil can iran consume?

With specialization Iran will be able to consume 1.7 bottles of olive oil.

Explanation:

Iran produces 4 barrels of oil and 6 bottles of olive oil.

Iraq produces 4 barrels of oil and 4 bottles of olive oil.

The opportunity cost of producing a barrel of oil for Iran

=

= 1.5

The opportunity cost of producing a barrel of oil for Iraq

=

= 1

Iraq has a lower opportunity cost for producing oil so we can say it has a comparative advantage in producing oil.

The opportunity cost of producing a barrel of olive oil for Iran

=

= 0.66

The opportunity cost of producing a barrel of olive oil for Iraq

=

= 1

Iran has a lower opportunity cost for producing olive oil so we can say it has a comparative advantage in producing it.

The terms of trade with specialization are 4 barrels of oil for 4.3 bottles of olive oil, and that 4 barrels of oil are indeed traded for 4.3 bottles of olive oil.

Without trade, Iran is consuming 4 barrels of oil and 6 bottles of olive oil.

With specialization, Iran will be able to consume

= 6 - 4.3

= 1.7 bottles of olive oil

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