Question

Suppose that Portugal and Denmark both produces beer and olive s, Portugal opportunity cost of producing a crate of olive is 4 barrel of beer while Denmark opportunity cost of producing a crate of olive is 10 barrel of beer

Answer 1

For producing a crate of olive Portugal has to give up only 4 barrels of beer while Denmark has to give up 10 barrels of beer. The opportunity cost of producing beer is less in Portugal or we can say Portugal has a comparative advantage in the production of Olives and Denmark has a comparative advantage in the production of Beer.

Portugal will specialize in the production of olives and Denmark will specialize in production beer. The trade will happen if in exchange for a crate of olive Portugal gets more than 4 beer and Denmark has to give less than 10 beers for the same crate of olives i.e. anything in between 4 to 10 in exchange for a crate of olives, the trade will happen.

If the Dutch have to give more than 10 beer for a crate of olives they will not trade or if the Portuguese receive less than 4 beer they will not trade.