3 The price of trade Suppose that Greece and Sweden both pro

3. The price of trade Suppose that Greece and Sweden both produce oil and cheese. Greece\'s opportunity cost of producing a pound of cheese is 5 barrels of oil while Sweden\'s opportunity cost of producing a pound of cheese is 10 barrels of oil By comparing the opportunity cost of producing cheese in the two countries, you can tell that production of cheese and has a comparative advantage in the has a comparative advantage in the production of oil. Suppose that Greece and Sweden consider trading cheese and oil with each other. Greece can gain from specialization and trade as long as it receives more than than of oil for each pound of cheese it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more of cheese for each barrel of oil it exports to Greece. Based on your answer to the last question, which of the following prices of trade (that is, price of cheese in terms of oil) would allow both Sweden and Greece to gain from trade? Check all that apply 12 barrels of oil per pound of cheese 2 barrels of oil per pound of cheese 6 barrels of oil per pound of cheese 9 barrels of oil per pound of cheese

Solution

Greece has a comparative advantage in the production of cheese as its opportunity cost is 5 barrels of oil which is cheaper than Sweden which has a higher opportunity cost ( 10 barrels of oil).

Sweden has a comparative advantage in the production of oil as its opportunity cost is 1/10 of pound of cheese which is lower than Greeces 1/5 pound of cheese.

5 barrels

1/10 pound of cheese.

3. 12 barrels, 6 barrels and 9 barrels, since these are higher than 5 barrels.