Terms of trade
Presume that Denmark and France both wine and produce oil. France's opportunity cost of producing a bottle of wine is 5 barrels of oil while Denmark's opportunity cost of producing a bottle of wine is 10 barrels of oil.
1.By comparing the opportunity cost of producing wine in the two countries, you can tell that ( Denmark, France) has a comparative advantage in the production of wine and (Denmark, France) has a comparative advantage in the production of oil.
2. Presume that France and Denmark consider trading wine and oil with each other. France can gain from specialization and trade as long as it receives more than (1 barrel, 1/10 barrel, 1/5 barrel, 5 barrels, 10 barrels) of oil for each bottle of wine it exports to Denmark. Likewise, Denmark can gain from trade as long as it receives more than (1 barrel, 1/10 barrel, 1/5 barrel, 5 barrel, 10 barrels) of wine for each barrel of oil it exports to France.
3. Which of the following terms of trade (that is, price of wine in terms of oil) would allow both Denmark and France to gain from trade? Check all that apply.
1. 2 barrels of oil per bottle of wine
2. 6 barrels of oil per bottle of wine
3. 9 barrels of oil per bottle of wine
4. 12 barrels of oil per bottle of wine