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Suppose that France and Germany both produce oil and cheese. France's opportunity cost of producing a pound of cheese is 5 barrels of oil while Germany's opportunity cost of producing a pound of cheese is 11 barrels of oil. By comparing the opportunity cost of producing cheese in the two countries, you can tell that France has a comparative advantage in the production of cheese and Germany has a comparative advantage in the production of oil. Suppose that France and Germany consider trading cheese and oil with each other. France can gain from specialization and trade as long as it receives more than5 barrels of oil for each pound of cheese it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than11 pounds of cheese for each barrel of oil it exports to France. Based on your answer to the last question, which of the following terms of trade (that is, price of cheese in terms of oil) would allow both Germany and France to gain from trade? Check all that apply.

Business Economics, Economics

  • Category:- Business Economics
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