1. By comparing the opportunity cost of producing wine in Greece and Germany, which country has a comparative advantage in the production of wine and which country has a comparative advantage in the production of oil?
2. If Greece and Germany consider trading wine and oil with each other, how much oil should Greece receive for each bottle of wine it exports to Germany in order to gain from specialization and trade? Similarly, how much wine should Germany receive for each barrel of oil it exports to Greece?
3. Which terms of trade (price of wine in terms of oil) would allow both Germany and Greece to gain from trade?
1. By comparing the opportunity cost of producing wine in the two countries, we can determine that Greece has a comparative advantage in the production of wine, while Germany has a comparative advantage in the production of oil.
2. Greece can gain from specialization and trade as long as it receives more than 5 barrels of oil for each bottle of wine it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than 1/5 barrel of wine for each barrel of oil it exports to Greece.
3. The terms of trade that would allow both Germany and Greece to gain from trade are 12 barrels of oil per bottle of wine, 2 barrels of oil per bottle of wine, and 6 barrels of oil per bottle of wine.
Comparative Advantage in Wine and Oil Production
Comparative advantage refers to a country's ability to produce a particular good or service at a lower opportunity cost than another country. In this case, Greece has a comparative advantage in the production of wine because its opportunity cost of producing a bottle of wine is lower than that of Germany.
Specialization and Trade
Specialization occurs when countries focus on producing goods and services in which they have a comparative advantage. By trading with each other, countries can benefit from the specialization of labor and resources, leading to increased efficiency and economic growth.
Terms of Trade
Terms of trade refer to the ratio at which countries exchange goods and services. In this scenario, the terms of trade that would benefit both Germany and Greece are those that allow for mutually beneficial trade, such as 12 barrels of oil per bottle of wine, 2 barrels of oil per bottle of wine, and 6 barrels of oil per bottle of wine.