What is one of the basic principles of economics?
1 answer:
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Answer:
Greece has a comparative advantage in the production of stained glass.
Germany has a comparative advantage in the production of oil.
Greece can gain from specialization and trade as long as it receives more than 4 barrels of oil.
Germany can gain from trade as long as it receives more than 0.1 pane of stained glass.
Trade price in this situation will be 8 barrels of oil per pane of stained glass and 6 barrels of oil per pane of stained glass.
Explanation:
Greece and Germany both produce oil and stained glass.
Greece's opportunity cost of producing a pane of stained glass
= 4 barrels of oil
Germany's opportunity cost of producing a pane of stained glass
= 10 barrels of oil
Greece has a comparative advantage in the production of stained glass as it has lower opportunity cost.
Greece's opportunity cost of producing a barrel of oil
=
= 0.25 pane of stained glass
Germany's opportunity cost of producing a barrel of oil
=
= 0.1 pane of stained glass
Germany has a comparative advantage in the production of oil as it has lower opportunity cost.
Greece can gain from specialization and trade as long as it receives more than 4 barrels of oil. Germany can gain from trade as long as it receives more than 0.1 pane of stained glass.
Both the countries will gain from trade if the trade price lies between their opportunity cost. So trade price in this situation will be 8 barrels of oil per pane of stained glass and 6 barrels of oil per pane of stained glass.