Suppose that Portugal and Germany both produce rye and shoes. Portugal's opportunity cost of producing a pair of shoes is 4 bushels of rye while Germany's opportunity cost of producing a pair of shoes is 10 bushels of rye. By comparing the opportunity cost of producing shoes in the two countries, you can tell that    has a comparative advantage in the production of shoes and    has a comparative advantage in the production of rye.   Suppose that Portugal and Germany consider trading shoes and rye with each other. Portugal can gain from specialization and trade as long as it receives more than    of rye for each pair of shoes it exports to Germany. Similarly, Germany can gain from trade as long as it receives more than    of shoes for each bushel of rye it exports to Portugal.   Based on your answer to the last question, which of the following prices of trade (that is, price of shoes in terms of rye) would allow both Germany and Portugal to gain from trade? Check all that apply. 8 bushels of rye per pair of shoes   2 bushels of rye per pair of shoes   18 bushels of rye per pair of shoes   6 bushels of rye per pair of shoes

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.