Question

Germany and Argentina produce two goods: barley and legumes. They are deciding whether they should engage in trade. Given their agricultural resources, each can produce the following:
Germany: 1200 barley OR 1200 legumes
Argentina: 700 barley OR 1200 legumes.

Imagine Sierra Leone had the following production: 100 barley OR 100 legumes. Which of the following is true?

Sierra Leone can trade with Argentina and both countries can gain from trade.

Sierra Leone can trade with Germany and both countries can gain from trade.

Sierra Leone can trade with Argentina but only Sierra Leone can gain from trade.

More than one answer is correct

Answer 1

Sierra Leone can trade with Argentina and both countries can gain from trade.

Explanation:

For Argentina, the opportunity cost for 1 unit of barley = 1200/700 = 1.71 units of legumes

For Argentina, the opportunity cost for 1 unit of legume = 700/1200 = 0.58 units of barleys

For Sierra Leone, the opportunity cost for 1 unit of barley = 100/100 = 1 units of legumes

For Sierra Leone, the opportunity cost for 1 unit of legume = 100/100 = 1 units of barleys

So, Argentina has a lower opportunity cost in the production of legumes and Sierra Leone has a lower opportunity cost in the production of barleys. Therefore, Argentina has a comparative advantage in the production of legumes and Sierra Leone has a comparative advantage in the production of barleys. Both these countries can trade and both can be benefitted.