Question

This problem illustrates an example of trade induced by comparative advantage. It assumes that China and France each have 1,000 production units. With one unit of production​ (a mix of​ land, labor,​ capital, and​ technology), China can produce either 12 containers of toys or 7 cases of wine. France can produce either 2 cases of toys or 7 cases of wine.​ Thus, a production unit in China is five times as efficient compared to France when producing​ toys, but equally efficient when producing wine. Assume at first that no trade takes place. China allocates 750 production units to building toys and 250 production units to producing wine. France allocates 250 production units to building toys and 750 production units to producing wine.

a. What is the production and consumption of China and France without​ trade?

b. Assume complete​ specialization, where China produces only toys and France produces only wine. What would be the effect on total​ production?

c.​ France's domestic price is 2 containers of toys equals 7 cases of wine. Assume China produces 12,000 containers of toys and exports 500 containers to France. Assume France in turn produces 7,000 cases of wine and exports 1,750 cases to China. What happens to total production and​ consumption?

Answer 1

Therefore, China and France can produce 9,500 containers of Toys by using 1,000 units both with a share of 750 units and 250 units by China and France respectively and China &France can also produce 7,000 cases of Wine by using 1,000 units both with a share of 250 units and 750 units by China and France respectively.