Question

In: Economics

Consider two countries, Germany and Italy, which produce two goods, beer and cheese. The labour requirements...

Consider two countries, Germany and Italy, which produce two goods, beer and cheese. The labour requirements (in hours) for producing one unit of these goods in each country are:

Beer

Cheese

Germany

aLB = 2

aLC = 3

Italy

aLB* = 5

aLC* = 4

Which country has the absolute advantage in the production of beer and which in the production of cheese? (Mark: 0.2)

Which country has the comparative advantage in the production of beer and which in the production of cheese? Describe the pattern of trade. (Mark: 0.6)

Determine the range of the international relative price defined as the price of beer over the price of cheese. (Mark: 0.2)

d) Suppose that the international relative price is

Pbeer

= 0.8 . Find the relative wage

P

cheese

rate

WItaly

and explain why the country with the higher wage, as well as the

W

Germany

country with the lower productivity, can be competitive in the good they specialize. (Mark: 1.0)

Solutions

Expert Solution

You need not state the definitions of AA and CA. The definitions are mentioned for the purpose of understanding the problem at hand.

a. Absolute Advantage (AA): When a country or an individua is more or absolutely efficient at producing a particular good than his/her rival country or individual, then the country or individual has an AA in the production of that good.

Germany has AA in Beer (It takes two hours to produce one unit of beer in Germany whereas it takes five hours to produce one unit of beer in Italy).

Similarly, Germany has AA in Cheese (It takes three hours to produce one unit of cheese in Germany whereasit takes four hours to produce one unit of cheese in Italy)

b. Comparative Advantage (CA): If a country or individual is relatively more efficient in the production of a good than another country or individual then we say that he/she has comparative advantage in production of that good. Comparative advantage measures efficiency in terms of relative magnitudes.

Relative price of Beer in Germany: (aLB / aLC) = 2/3 = 0.67

Relative price of Beer in Italy: (aLB*/aLC*) = 5/4 = 1.25

Germany has CA in beer as beer is cheaper in Germany. (aLB/aLC < aLB*/aLC*)

Relative price of Cheese in Germany: (aLC / aLB) = 3/2 = 1.5

Relative price of cheese in Italy: (aLC*/aLB*) = 4/5 = 0.8

Italy has CA in cheese as cheese is cheaper in Italy. (aLC*/aLB* < aLC / aLB)

Pattern of Trade: Since Germany has CA in beer, it should specialize and produce more of beer. Italy has CA in cheese and hence should specialize and produce more of cheese.

c. Range: (aLB/aLC)G < PB/PC < (aLB*/aLC*)I = 0.67 < PB/PC < 1.25

d. Autrky wages in units of goods are just the reciprocals of the respective unit labor requirements.

Germany: wG/pB = 1/aLB = 1/2 = 0.5, wG/pC = 1/aLC = 1/3 = 0.33

Italy: wI/pB = 1/aLB* = 1/5 = 0.2 ,wI/pC = 1/aLC* = 1/4 = 0.25

Since wages depend on price ratio, it follows:

Germany: wG/pB = (wG/pC)(PB/PC) = (0.33)(0.8) = 0.264

Italy: wI/pc = (wI/pB)(PB/PC) = (0.2)(0.8) = 1.6

WItaly/WGermany = 1.6/0.264 = 6.06


Related Solutions

Two countries produce two different items, root beer and cheese. The table below shows the amounts...
Two countries produce two different items, root beer and cheese. The table below shows the amounts of each commodity that each country can produce with 400 units of factor inputs (productive units). Before trade consumption in each country is equal to production – that is, if trade is warranted, citizens need to receive at least as much root beer and cheese as they started with before trade. Given the following production levels, calculate the best possible trading scenario that maximizes...
Suppose that two countries, Italy and Palestine, produce olive oil. The currency used in Italy is...
Suppose that two countries, Italy and Palestine, produce olive oil. The currency used in Italy is the euro (EUR), while Palestine uses the New Israeli Shekel (NIS). In Italy, olive oil sells 6€ per litre. The exchange rate is 5 NIS per 1 EUR. a. If the law of one price holds, what is the price of olive oil in Palestine, measured in NIS? (5 points) b. Assume the average market price of olive oil in Palestine is actually 24...
describe the rise of nationalism, especially in countries such as Germany and Italy
describe the rise of nationalism, especially in countries such as Germany and Italy
Situation: Suppose there are two countries, Germany and India, and two goods, bicycles and textiles. Germany...
Situation: Suppose there are two countries, Germany and India, and two goods, bicycles and textiles. Germany has a resource endowment of 42,444,325 units of labor and 8,873,941 million units of capital, while India has a resource endowment of 475,090,729 units of labor and 10,299,894 million units of capital. Each bicycle requires 100 units of capital and 10 units of labor to produce, and each unit of textiles requires 40 units of capital and 2 units of labor to produce. Question:...
Situation: Suppose there are two countries, Germany and India, and two goods, bicycles and textiles. Germany...
Situation: Suppose there are two countries, Germany and India, and two goods, bicycles and textiles. Germany has a resource endowment of 42,444,325 units of labor and 8,873,941 million units of capital, while India has a resource endowment of 475,090,729 units of labor and 10,299,894 million units of capital. Each bicycle requires 100 units of capital and 10 units of labor to produce, and each unit of textiles requires 40 units of capital and 2 units of labor to produce. Question:...
Assume that the world consists of two countries – US and Germany. Both the countries produce...
Assume that the world consists of two countries – US and Germany. Both the countries produce two goods – Automobiles and Corn. There are three factors of production, Capital, Land and Labour. The specific factor in Automobiles is Capital while in Corn it is Land. Labour is used in the production of both the goods. Germany is assumed to be relatively more well- endowed in Capital than the US, while US is relatively more well-endowed in Land than Germany. Answer...
Consider two countries, A and B. Each country has 120 total labour hours to produce two...
Consider two countries, A and B. Each country has 120 total labour hours to produce two goods X and Y , and each country has preferences given by the utility function U = min(x,y) No other inputs are required to produce these goods. Their production technologies are the following. In country A, production of one unit of X requires 2 labour hours and that of Y requires 1 labour hour. In country B, production of one unit of X requires...
There are two countries, Lilliput and Blefuscu, which produce two goods: cilantro and hummus. In a...
There are two countries, Lilliput and Blefuscu, which produce two goods: cilantro and hummus. In a single year, Lilliput can produce 4,000 tons of cilantro or 4,000 tons of hummus. In the same period of time, Blefescu can produce 500 tons of cilantro or 300 tons of hummus. Show your work as you answer these questions. (e) Prior to trade, Lilliput makes 2,000 tons of cilantro, and Blefuscu makes 300 tons of cilantro. Draw these allocations on separate Production Possibilities...
Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth...
Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth and tablet computers. The production of both goods uses capital and labor in fixed proportions, with the tablets industry using more capital per worker than the cloth industry. The units of each input needed to produce one unit output are given by: capital Labor Cloth 1 2 Tablets 2 1 Both countries have 150 units of capital available for production, but the Home country...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​ (with labor and​ land). Initially, both countries have the same supply of labor ​(100 units​ each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. a....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT