Suppose there are only two goods (bread and wine) and only two countries (England and Portugal). In England, the cost of producing 1 bottle of wine is 4 loaves of bread. What is the cost of producing 1 loaf of bread in England? Under what circumstances will England specialize in bread production and purchase its wine from Portugal? Explain.

What will be an ideal response?


If 1 bottle of wine costs 4 loaves of bread in England, then 1 loaf of bread must cost 1/4 bottle of wine. For England to specialize in bread production, England must be a more efficient bread producer than Portugal, which means that England's cost of producing bread must be less than Portugal's cost. Thus if producing 1 loaf of bread in Portugal costs more than 1/4 bottle of wine (or, equivalently, if producing 1 bottle of wine in Portugal costs less than 4 loaves of bread), then England will specialize in bread production and Portugal will specialize in wine production.

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