5. The price of trade
Suppose that Ireland and Wales both produce olive oil and broccoli. Ireland's opportunity cost of producing a bushel of broccoli is 4 crates of olive oil
while Wales's opportunity cost of producing a bushel of broccoli is 10 crates of olive oil.
By comparing the opportunity cost of producing broccoli in the two countries, you can tell that Ireland has a comparative advantage in the
production of broccoli and Wales has a comparative advantage in the production of olive oil.
Suppose that Ireland and Wales consider trading broccoli and olive oil with each other. Ireland can gain from specialization and trade as long as it
receives more than 4 of olive oil for each bushel of broccoli it exports to Wales. Similarly, Wales can gain from trade as long as it
receives more than 1/10 of broccoli for each crate of olive oil it exports to Ireland.
Based on your answer to the last question, which of the following prices of trade (that is, price of broccoli in terms of olive oil) would allow both Wales
and Ireland to gain from trade? Check all that apply.
13 crates of olive oil per bushel of broccoli
5 crates of olive oil per bushel of broccoli
9 crates of olive oil per bushel of broccoli
1 crate of olive oil per bushel of broccoli
