Terms of trade

Suppose that Portugal and Germany both produce oil and olives. Portugal's opportunity cost of producing a crate of olives is 3 barrels of oil while Germany's opportunity cost of producing a crate of olives is 10 barrels of oil.

By comparing the opportunity cost of producing olives in the two countries, you can tell that Portugal has a comparative advantage in the production of olives and Germany has a comparative advantage in the production of oil.

Suppose that Portugal and Germany consider trading olives and oil with each other. Portugal can gain from specialization and trade as long as it receives more than3 barrels of oil for each crate of olives it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than1/10 crate of olives for each barrel of oil 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 oil) would allow both Germany and Portugal to gain from trade? Check all that apply.

2 barrels of oil per crate of olives

1 barrel of oil per crate of olives

4 barrels of oil per crate of olives

18 barrels of oil per crate of olives