Suppose that Spain and Germany both produce rye and olives. Spain's opportunity cost of producing a crate of olives is 5 bushels of rye while Germany's opportunity cost of producing a crate of olives is 10 bushels of rye. By comparing the opportunity cost of producing olives in the two countries, you can tell thathas a comparative advantage in the production of olives andhas a comparative advantage in the production of rye. Suppose that Spain and Germany consider trading olives and rye with each other. Spain can gain from specialization and trade as long as it receives more thanof rye for each crate of olives it exports to Germany. Similarly, Germany can gain from trade as long as it receives more thanof olives for each bushel of rye it exports to Spain. Which of the following prices of trade (that is, price of olives in terms of rye) would allow both Germany and Spain to gain from trade? a. 9 bushels of rye per crate of olives. b. 15 bushels of rye per crate of olives. c. 8 bushels of rye per crate of olives. d. 3 bushels of rye per crate of olives.

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

Germany is able to produce more Rye if it is not producing olives meaning that they are more efficient in this giving them the comparative Advantage.

Spain is able to produce 2x more Olives than Germany for the same amount of Rye so they are more efficient in this manner.

2. Spain can gain from specialization and trade as long as it receives more than 5 bushels of rye for each crate of olives it exports to Germany.

If Spain can get more bushels per Olives than it can produce on it's own then they will make a gain.

3. Similarly, Germany can gain from trade as long as it receives more than ⅒ or 0.1 crate of olives for each bushel of rye it exports to Spain.

Similarly if Germany can get more crates of Olives per Rye than it can produce then it makes a gain. For each Bushel of Rye, Germany can create 0.1 crate of olives. Should they get more than this 0.1 crate then they make a gain.

4. The amount of Rye being exchanged for Olives should be between 5 and 10 bushels.

a. 9 bushels of rye per crate of olives.

c. 8 bushels of rye per crate of olives

At both 8 and 9 bushels of Rye per Olive Crate Germany would be getting more Rye per crate of olive than they can produce on their own and similarly at both 8 and 9 bushes of Rye for olives, Spain would getting more bushels than they could have gotten if they gave up olives to produce Rye.

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