Suppose that France and Sweden both produce jeans and olives. France’s opportunity cost of producing a crate of olives is 4 pairs of jeans, while Sweden’s opportunity cost of producing a crate of olives is 10 pairs of jeans. By comparing the opportunity cost of producing olives in the two countries, you can tell that has a comparative advantage in the production of olives, and has a comparative advantage in the production of jeans. Suppose that France and Sweden consider trading olives and jeans with each other. France can gain from specialization and trade as long as it receives more than of jeans for each crate of olives it exports to Sweden. Similarly, Sweden can gain from trade as long as it receives more than of olives for each pair of jeans it exports to France. Based on your answers to the previous question, which of the following terms of trade (that is, price of olives in terms of jeans) would allow both Sweden and France to gain from trade? a. 1 pair of jeans per crate of olives b. 2 pairs of jeans per crate of olives c. 16 pairs of jeans per crate of olives d. 7 pairs of jeans per crate of olives

France - Comparative Advantage in Olives, Sweden - Comparative Advantage in Jeans. France gains in trade by > 4 jeans/ olive, Sweden gains in trade by > 1/10 olive/jeans. d) 7 pair jeans per crate olives.

Explanation:

France opportunity cost of producing a crate of olives is 4 pairs of jeans, while Sweden’s opportunity cost of producing a crate of olives is 10 pairs of jeans.

As France opportunity cost of olive (in terms of jeans' pair sacrifised) is lesser than Sweden, it has comparative advantage in olives. Similarly, Sweden opportunity cost of jeans (in terms of olives sacrifised) is lesser ie 1/10, than France opportunity cost ie 1/4. So, Sweden has opportunity cost in Jeans.

France can gain in trade if it gets more than 4 pair jeans per olive crate. Sweden can gain in trade if it gets more than 1/10 olive crate per jeans pair.

'7 pairs of jeans per crate of olives' satisfies gainful trade conditions for both France & Sweden as : 7 (ie > 4) Jeans per olive, 1/7 (ie > 1/10) olive per jeans.