5. The price of trade
Suppose that Croatia and Wales both produce ale and wheat. Croatia's opportunity cost of producing a bushel of wheat is 4 kegs of ale while Wales's
opportunity cost of producing a bushel of wheat is 11 kegs of ale.
By comparing the opportunity cost of producing wheat in the two countries, you can tell that Croatia
production of wheat and Wales has a comparative advantage in the production of ale.
has a comparative advantage in the
Suppose that Croatia and Wales consider trading wheat and ale with each other. Croatia can gain from specialization and trade as long as it receives
more than 4 kegs of ale for each bushel of wheat it exports to Wales. Similarly, Wales can gain from trade as long as it receives more than
1/11 bushel of wheat for each keg of ale it exports to Croatia.
Based on your answer to the last question, which of the following prices of trade (that is, price of wheat in terms of ale) would allow both Wales and
Croatia to gain from trade? Check all that apply.
8 kegs of ale per bushel of wheat
6 kegs of ale per bushel of wheat
16 kegs of ale per bushel of wheat
3 kegs of ale per bushel of wheat