5. The price of trade Suppose that France and Germany both produce beer and olives. France\'s opportunity cost of producing a crate of olives is 3 barrels of beer while Germany\'s opportunity cost of producing a crate of olives is 11 barrels of beer has a comparative advantage in the By comparing the opportunity cost of producing olives in the two countries, you can tell that production of olives and has a comparative advantage in the production of beer. Suppose that France and Germany consider trading olives and beer with each other. France can gain from specialization and trade as long as it receives more than receives more than of beer for each crate of olives it exports to Germany. Similarly, Germany can gain from trade as long as it of olives for each barrel of beer it exports to France Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of beer) would allow both Germany and France to gain from trade? Check all that apply. 13 barrels of beer per crate of olives 1 barrel of beer per crate of olives 2 barrels of beer per crate of olives 4 barrels of beer per crate of olives
France specializes in the production of the good in which it has a lower relative opportunity cost and this is measured by comparative advantage. France has an opportunity cost of producing one crate of olives = 3 barrels of beer. The same for Germany is 11 barrels of beer. Hence it is Germany hat has comparative advantage in production of beer and France has comparative advantage in production of olives.
When trade occurs France specializes in the production of olives and Germany specializes in the production of beer Trade price or terms of trade lies between the opportunity costs. Hence France gains from trade as long as it receives a price of more than 3 barrels of beer while Germany must receive more than 1/11 crates of olives to have trade gains.
4 barrels per crate of olive lies between the opportunity costs. Hence it is the correct choice.
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