Suppose that Greece and Switzerland both produce oil and olives. Greece's opportunity cost of producing a crate of olives is 5 barrels of oil while Switzerland's opportunity cost of producing a crate of olives is 10 barrels of oil.
By comparing the opportunity cost of producing olives in the two countries, you can tell that has a comparative advantage in the production of olives and has a comparative advantage in the production of oil.
Suppose that Greece and Switzerland consider trading olives and oil with each other. Greece can gain from specialization and trade as long as it receives more than of oil for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than of olives for each barrel of oil it exports to Greece. Based on your answers to the previous question, which of the following terms of trade (that is, price of olives in terms of oil) would allow both Switzerland and Greece to gain from trade?
a. 2 barrels of oil per crate of olives
b. 12 barrels of oil per crate of olives
c. 9 barrels of oil per crate of olives
d. 1 barrel of oil per crate of olives
Answers: 2
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Suppose that Greece and Switzerland both produce oil and olives. Greece's opportunity cost of produc...
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