Suppose the UK and Norway both produce oil and shoes, which are sold for the same prices in both countries. UK's opportunity cost of producing one unit of oil is 2 pairs of shoes and Norway's opportunity cost of producing one unit of oil is 1/2 pair of shoes. If both countries decide to specialize and then trade between themselves, which country should produce oil

Question

Arielle Clayton

Business

6 September, 21:35

Suppose the UK and Norway both produce oil and shoes, which are sold for the same prices in both countries. UK's opportunity cost of producing one unit of oil is 2 pairs of shoes and Norway's opportunity cost of producing one unit of oil is 1/2 pair of shoes. If both countries decide to specialize and then trade between themselves, which country should produce oil

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Answers (1)

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Talan · Answer 1

Norway

Explanation:

UK and Norway are producing two goods: Oil and shoes

UK's opportunity cost of producing 1 unit of oil = 2 pairs of shoes

Norway's opportunity cost of producing 1 unit of oil = 1/2 pair of shoes

Therefore,

Once trade is allowed among the trading nations, then a nation is exporting a commodity in which it has a comparative advantage and importing a commodity in which it has a comparative disadvantage.

Norway has a comparative advantage in producing oil because it has a lower opportunity of producing oil as compared to UK.

Hence,

Norway should produce oil.