Question

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

Answer 1

Norway

Step-by-step 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.