Answered: Suppose that Spain and Greece both…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that Spain and Greece both produce wine and olive oil. The following table shows combinations of the goods that each country can produce in a week (in thousands of liters).

Spain	Greece
Wine	Olive Oil	Wine	Olive Oil
0	16	0	30
1	12	1	24
2	8	2	18
3	4	3	12
4	0	4	6
--	--	5	0

a. Who has a comparative advantage in producing wine? Who has a comparative advantage in producing olive oil? Explain

b. Suppose that Spain is currently producing 1000 liters of wine and 12000 liters of olive oil per week and Greece is currently producing 3000 liters of wine and 12000 liters of olive oil per week. Demonstrate that Spain and Greece can both be better off if they specialise in producing only one good and then engage in trade.

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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