What can we deduce from the opportunity cost of producing olives in France and Denmark? How can both countries gain from trade based on their opportunity costs?
Comparative Advantage Analysis
France's opportunity cost of producing a crate of olives is 4 barrels of oil, while Denmark's opportunity cost of producing a crate of olives is 7 barrels of oil. Comparing the opportunity costs, we can conclude that France has a comparative advantage in the production of olives, and Denmark has a comparative advantage in the production of oil.
Specialization and Trade Benefits:
If France and Denmark consider trading olives and oil with each other, France can benefit from specialization and trade as long as it receives more than 4 barrels of oil for each crate of olives it exports to Denmark. Similarly, Denmark can gain from trade as long as it receives more than 1/7 crate of olives for each barrel of oil it exports to France.
What terms of trade would allow both Denmark and France to benefit from trade in olives and oil?
Terms of Trade for Mutual Benefit
The terms of trade that would allow both Denmark and France to gain from trade include:
- 6 barrels of oil per crate of olives.
- 5 barrels of oil per crate of olives.
Choosing any of the above terms of trade would ensure that both countries can benefit from their comparative advantages and engage in mutually beneficial trade in olives and oil.