Comparative Advantage and Terms of Trade Between Greece and Switzerland
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?
1) Greece has a comparative advantage in the production of olives and Switzerland has a comparative advantage in the production of oil. 2) Greece can gain from specialization and trade as long as it receives more than 5 barrels of oil for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than 1/10 crates of olives for each barrel of oil it exports to Greece. 3) Option B. 12 barrels of oil per crate.
Explanation:
B) Switzerland will save more oil if it doesn't produce olives than Greece would save, so it has a comparative advantage in producing barrels of oil.
C) Since Greece produces one crate of olive with 5 barrels of oil, it will only gain in any trade trading more than 5 barrels of oil for every crate of olive.
D) Since Switzerland produces 1 crate of olive with 10 barrels of oil, it will only gain in a trade trading 1/10 crates of olive for one barrel of oil.
E) Only option B will satisfy both countries.