5 the price of trade suppose that ireland and norway both...

5. The price of trade Suppose that Ireland and Norway both produce olive oil and broccoli. Ireland's opportunity cost of producing a bushel of broccoli is 5 crates of olive oil while Norway's opportunity cost of producing a bushel of broccoli is 9 crates of olive oil. By comparing the opportunity cost of producing broccoli in the two countries, you can tell that has a comparative advantage in the production of broccoli and has a comparative advantage in the production of olive oil. Suppose that Ireland and Norway consider trading broccoli and olive oil with each other. Ireland can gain from specialization and trade as long as it receives more than

Transcript

00:02 Sorry about barrels of oil and cheese.

00:05 So i'm going to call the barrels of oil b, and i'm going to call the cheese, right? and we have two countries.

00:14 And we're told something about their opportunity cost.

00:17 For greece, the opportunity cost of producing one cheese is equal to four barrels of oil.

00:25 But for sweden, the opportunity cost of one cheese is they have to give up 10 barrels of oil, right? i'm setting these things equal because they have equal costs, right? either country can choose to produce one or the other at the same cost.

00:41 So here, greece has comparative advantage in cheese.

00:52 And it has comparative advantage in cheese because it has to give up less oil to get the cheese, right? sweeten has to give up more oil.

01:00 Grease has to give up more barrels of oil.

01:03 So greece has the comparative advantage in cheese.

01:05 But if we flip these, right, i'm going to divide both of them by four.

01:10 I get 0 .25c equals 1b, first greece.

01:15 And for sweden, i get 0 .1c is equal to 1b.

01:20 So sweden has comparative advantage in oil, right? because for sweden, to produce one barrel of oil, it gives up less cheese.

01:30 It gives up 0 .1 cheese as opposed to greece, which would have to give up 0 .5 cheese.

01:34 So the pattern of trade here between greece and sweden is that greece is going to send cheese to sweden because greece is good at cheese and sweden will return oil to greece because sweden is good at oil, right? so the key things are here is about the terms of trade, which are going to be mutually acceptable to both of these countries, right? if we're thinking about selling cheese, grease needs greater than four barrels per cheese...

Question

Please give Ace some feedback