Question

The price of trade Suppose that Portugal and Germany both produce beer and olives. Portugal'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. By comparing the opportunity cost of producing olives in the two countries, you can tell thatPortugal has a comparative advantage in the production of olives andGermany has a comparative advantage in the production of beer. Suppose that Portugal and Germany consider trading olives and beer with each other. Portugal can gain from specialization and trade as long as it receives more than3 barrels of beer for each crate of olives it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than1/11 crate of olives for each barrel of beer it exports to Portugal. 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 Portugal to gain from trade? Check all that apply.
4 barrels of beer per crate of olives
7 barrels of beer per crate of olives
1 barrel of beer per crate of olives
2 barrels of beer per crate of olives

Answer 1

Answer: Both 4 barrels and 7 barrels of beer per crates of olives will allow both Germany and Portugal to gain from trade.

Step-by-step explanation: For every 1 crate of olives produced by Portugal, they will not be able to produce 3 barrels of beer in return. Therefore, for portugal to trade a crate of olives for barrels of beer more than 3 means they are gaining on the trade, in this case, they gain 1 (option A) and 4(option B) extra barrels of beer for every crate of olive traded with Germany. Likewise Germany gains in both cases because any exchange of barrels of beer that is less than 11 barrels of beer to a crate of olives is a gain for Germany. Therefore both 4 barrels and 7 barrels for a crate of olives will lead to both countries gaining.