Comparative Advantage: France Specializes in Wine, Imports Olive Oil

Suppose Italy can produce 6 bottles of olive oil or 3 bottles of wine with 1 unit of labor, and France can produce 2 bottles of olive oil or 4 bottles of wine with 1 unit of labor. If Italy can trade only with France, then the theory of comparative advantage suggests that:

France should produce both olive oil and wine, and import nothing from Italy.

France should specialize in producing wine and import olive oil from Italy.

France should specialize in producing olive oil and import wine from Italy.

France should import both olive oil and wine from Italy.

To determine the best course of action based on the theory of comparative advantage, we need to analyze the opportunity costs for both Italy and France in producing olive oil and wine.

Italy's Production:

• 1 unit of labor can produce either:
  • 6 bottles of olive oil, or
  • 3 bottles of wine.

Opportunity Cost for Italy:

• To produce 1 bottle of olive oil, Italy gives up ( \frac{3}{6} = 0.5 ) bottles of wine.
• To produce 1 bottle of wine, Italy gives up ( \frac{6}{3} = 2 ) bottles of olive oil.

France's Production:

• 1 unit of labor can produce either:
  • 2 bottles of olive oil, or
  • 4 bottles of wine.

Opportunity Cost for France:

• To produce 1 bottle of olive oil, France gives up ( \frac{4}{2} = 2 ) bottles of wine.
• To produce 1 bottle of wine, France gives up ( \frac{2}{4} = 0.5 ) bottles of olive oil.

Comparative Advantage:

• Italy has a lower opportunity cost for producing olive oil (0.5 bottles of wine) compared to France (2 bottles of wine). Therefore, Italy has a comparative advantage in producing olive oil.
• France has a lower opportunity cost for producing wine (0.5 bottles of olive oil) compared to Italy (2 bottles of olive oil). Therefore, France has a comparative advantage in producing wine.

Conclusion: Based on the theory of comparative advantage, Italy should specialize in producing olive oil and France should specialize in producing wine. France should import olive oil from Italy.

Thus, the correct answer is: France should specialize in producing wine and import olive oil from Italy.