In: Economics
Spain and France can both grow grapes for wine, or raise pigs for ham. Suppose that with one acre of land, Spain can produce 10 barrels of wine or 10 pigs, while France can produce 15 barrels of wine or 12 pigs.
(a) Which country has the absolute advantage for each item? What about compara- tive advantage?
(b) If they should trade, which country should specialize in which good?
(c) Draw a Production Possibilities Frontier for each country, assuming 10 acres of land being used.
(d) Assume both countries care only about having an equal number of wine and pigs, and getting as many equal pairs as possible. How much would they each produce before trade?
(e) At what exchange rates would trading be mutually beneficial?
(f) Come up with a possible trading scheme that improves outcomes for both coun- tries.