Question

Assume Greece and Italy produce olive oil and fish oil that are sold for the same prices in each country. The following table shows the combinations of olive oil and fish oil that each country can produce in a day using the same amounts of capital and labor:

Greek Olive Oil (Thousands of Bottles)	Greek Fish Oil (Thousands of Bottles)	Italian Olive Oil (Thousands of Bottles)	Italian Fish Oil (Thousands of Bottles)
0	20	0	10
2	15	1	7.5
4	10	2	5
6	5	3	2.5
8	0	4	0

With the information above in mind, address and answer the following:

A.    Explain the concept of absolute advantage using the information in the table above.

B.   Explain the concept of comparative advantage.

C.    Who has the comparative advantage in producing olive oil? Fish oil? Explain.

D.   Will Greece and Italy benefit from specialization and trade? Explain.

Answer 1

A)Greek has absolute advantage in Olive oil as well as in Fish Oil. A country has absolute advantage in a commodity which this econony had more productivity than any economy.

B) opportunity cost is the second best alternate forgone. Or no of unit sacrificed of second good in order to gain an additional unit of first food. A country has comparative advantage in a good which has min. Opportunity cost compared to other economy

c)opp. Cost of olive oil in Greek=20/8=2.5

Opp cost of olive in Italy=10/4=2.5

Thus neither country has comparative advantage in any good.

D) No Greece and Italy cant benefit from trade