suppose two countries, France & Germany, use only capital and labor for production. France has 2050...

suppose two countries, France & Germany, use only capital and labor for production. France has 2050 units of capital and 916 units of labor and Germany has 816 units of capital and 270 units of labor. Both countries produce two goods, car and wine. In Germany there are 366 units of capital and 135 units of labor employed in the wine industry. In frnace, there are 926 units of capital and 618 units of labor employed in the wine industry.

1. Which country is labor-abundant? Which country is capital-abundant? Explain.

2. Which industry is labor intensive in Germany? Which industry is capital-intensive in Germany? Explain.

3. suppose that france and Germany do not engage in international trade. Assuming that the countries have identical preferences which country would have the cheaper relative price for wine. Explain.

4.Now suppose the two countries trade with one another. What will happen to the relative price of wine in france? In Germany? Explain.

5. What are the effects of free trade on wage and rental on capital in Germany? Explain.

Edit: Those units of capital and labor in the car industry is not given.

Solutions

Expert Solution

1. France is labor abundant and germany is capital abundant because the capital labor ratio in france (2050/916) is less than that in Germany. ( 816/270)

2. In Germany, there is a total of 816 units of capital out of which 366 is used is used in wine which means the rest of it i.e 816 - 366 = 450 units are used in car industry and hence car industry is more capital intensive as 450 is greater than 366. While on the other hand, there is a total of 270 units of labor or of which 135 is used in wine and rest 135 is used in car and hence both car and wine industry are equally capital intensive

3. Without free trade, relative price of wine will be cheaper in France because france is a labor abundant country and wine is a labor intensive good

4. Wine is a labor intensive good while car is a capital intensive good. France is abundant in labor and hence will produce and export wine which is labor intensive while germany which is capital abundant will produce car. Since resources are allocated efficiently in free trade, the relative price of wine will fall in both france ans germany

Rahul Sunny answered 1 year ago

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