Question

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.

Answer 1

1. France has an absolute advantage in the production of both wine and pigs has it can make more of both the goods in the same piece of land. France comparative cost of producing Wine= 12/15=.8, Spain comparative cost =10/10=1. France comparative cost of producing Pig= 15/12= 1.25, Spain’s is 10/10=1. Since the comparative cost of producing Wine is cheap or less for France (.8<1), so France has a comparative advantage in producing Wine, while Spain has a comparative advantage in producing Pig.
2. If they should trade, France should specialize in producing wine, while Spain should specialize in producing Pig, because of lower opportunity costs.
3. 
4. If both want an equal number of wine and pigs, Spain would produce 50 barrels of wine and 50 pigs as 100 is the total amount that can be produced in 10 acres of land. France can produce a maximum of 150 barrels of wine or 120 pigs. To equalize both, he would distribute its resources across the goods, ending up making 69 wines and 64 pigs or 63 wines and 68 pigs.