Question

German worker can produce 8 kilos of ham OR 12 plastic chairs a day. A Canadian worker can produce 10 kilos of ham a day OR 8 plastic chairs a day. Assume trade and specialization are voluntary.
a) Who will be the exporter of ham? Who will be the exporter of plastic chairs? You must justify your answer with calculations, otherwise no marks will be awarded.
b) Would a price of 1 Ham per Plastic Chair be acceptable to both countries? No explanation, no marks .

Answer 1

Given,

A German worker can produce 8 kilos of ham OR 12 plastic chairs a day.

A Canadian worker can produce 10 kilos of ham a day OR 8 plastic chairs a day.

a) Canadians should be the exporter of ham, because they have an absolute advantage in production of ham. This is because as we can see a Canadian worker can produce 10kg of ham per day whereas a German worker can produce only 8kg of ham per day. So Canada has an absolute advantage of 10-8= 2kg per worker per day.

Germans should be the exporter if plastic chair, because they have an absolute advantage in production of chairs as 12 is larger than 8 by 4. So if they produce plastic chairs they can produce 4 chairs more per worker per day as compared to Canada.

b) No, a price of 1 ham per plastic chair will not be acceptable to Canadians, though it will be happily acceptable to Germans. This is because as we can see that after specialisation by using 1 worker only 10 hams can be produced but by the same one worker 12 plastic chairs can be produced, this shows that plastic chairs are cheaper than ham. So if the price of ham and plastic chairs are same, it will be a loss to the producer of the ham and hence they will not accept this price.