Based on the data provided, which of the following prices of trade would allow both Denmark and Italy to gain from trade?
To determine the prices of trade that would allow both Denmark and Italy to gain from trade, we need to consider their comparative advantage in the production of olives and oil. Denmark has a comparative advantage in the production of olives, while Italy has a comparative advantage in the production of oil. Therefore, the prices of trade that would benefit both countries are 2 barrels of oil per crate of olives and 7 barrels of oil per crate of olives.
Comparative Advantage in Production
Denmark's opportunity cost of producing a crate of olives is 10 barrels of oil, while Italy's opportunity cost is 4 barrels of oil. This indicates that Denmark has a lower opportunity cost for producing olives and, hence, a comparative advantage in olive production. On the other hand, Italy possesses a comparative advantage in oil production.
Mutually Beneficial Trade
For trade to be mutually beneficial, the terms of trade should allow both countries to obtain a better deal than their respective opportunity costs. Denmark can gain from trade if it receives more than 10 barrels of oil for each crate of olives exported to Italy. Similarly, Italy can benefit if it receives more than 4 barrels of oil for each crate of olives exported to Denmark.
Optimal Prices of Trade
Among the options provided, the prices of trade that would enable both countries to benefit are 2 barrels of oil per crate of olives (below Denmark's opportunity cost) and 7 barrels of oil per crate of olives (below Italy's opportunity cost).
For a deeper understanding of comparative advantage and trade theory, you can explore more resources on the topic. Remember, understanding these concepts is crucial in determining optimal trade conditions for nations.