Question

Answer the questions below using the information given in the following table.

	China	France
Pairs of boots produced per hour	4	8
Bottles of wine per hour	2	16
Comparative advantage	?	?

1. Which country has a comparative advantage in the production of boots?

b. Provide the range of the international relative price of wine at which the two countries would trade.

Answer 1

a)

A comparative advantage is when a country produces any good with a lesser opportunity cost than other countries.

Trade off table

Country	Pairs of boots produced per hour	Opportunity cost (wine/boots)	Bottles of wine per hour	Opportunity cost (boots/wine)
China	4	2/4= 0.5	2	4/2= 2
France	8	16/8= 2	16	8/16= 0.5

from the above table it is evident that China has an advantage of boots per wine as they can produce more boots/wine using the same factor of production than that of France in an hour.

b) relative price:

Considering China and France, and they they are producing two goods, i.e boots and wine with a fixed unit of labour per hour. in this case the in equilibrium the world price of boots and wine will e between 0.5 and 2 wine per boots.

the opportunity costs explain the equilibrium relative prices of trade (0.5 and 2), which the structure of the demand determines the relative price.

therefore,

this also resembles the slope of the budget line for the consumers.