Use the information in the table on labor productivities in France and Germany t

Question

Use the information in the table on labor productivities in France and Germany to answer the following
question

Output per Hour Worked

France: cheese is 1 kilogram, cars is 0.25 car
Germany: cheese is 2 kilograms, cars is 2 cars

a. Which country has an absolute advantage in cheese? In cars?
b. What is the relative price of cheese in France if it does not trade? In Germany, if it does
not trade?
c. What is opportunity cost of cheese in France? In Germany?
d. Which country has a comparative advantage in cheese? In cars? Show how you know.
e. What are the upper and lower bounds for the trade price of cheese?

Explanation / Answer

Output per hour worked:
                                                           Cheese                                                Cars
France                                                 1 kg                                                    0.25
Germany                                             2 kg                                                     2

(a) In one hour, Germany produces more cheese than does France. Therefore, Germany has absolute advantage in the production of cheese.

In one hour, Germany manufactures more cars than does France. Therefore, Germany has absolute advantage in the production of cars as well.

(b) Producing 1 kg of cheese takes 1 hour in France. And in one hour, France can produce 0.25 cars. Therefore, the relative price of cheese in France is 0.25. That is, in France, the opportunity cost of producing cheese is 0.25 cars.

Producing 1 kg of cheese takes 0.5 (=1/2) hours in Germany. And in 0.5 hours, Germany can produce 1 (=2×0.5) cars. Therefore, the relative price of cheese in Germany is 1. That is, in Germany, the opportunity cost of producing cheese is 1 car.

(c)

Since the relative price of cheese in France is 0.25, the opportunity cost of producing (one kilogram of) cheese in France is 0.25 cars.

Since the relative price of cheese in Germany is 1, the opportunity cost of producing (one kilogram of) cheese in Germany is 1 car.

(d)

Since the opportunity cost of producing cheese is lower in France. France has comparative advantage in the production of cheese.

Producing 1 car takes 4 (= 1/0.25) hours in France. And in four hours, France can produce 4 (= 1×4) kilogram of cheese. Therefore, the opportunity cost of producing cars in France is 4 kilograms of cheese.

Producing 1 car takes 0.5 (= 1/2) hours in Germany. And in 0.5 hours, Germany can produce 1 (= 2×0.5) kilogram of cheese. Therefore, the opportunity cost of producing cars in Germany is 1 kilogram of cheese.

Since the opportunity cost of producing cars is lower in Germany, Germany has comparative advantage in the production of cars.

(e)

France will specialize in the production of cheese because France has comparative advantage in the production of cheese. Since the relative price of cheese is 1 car in Germany, Germany will not buy cheese for higher than 1 car. Therefore, the upper bound for the trade price of cheese is 1 car.

Since the relative price of cheese is 0.25 cars in France, France will not sell cheese for lower than 0.25 cars. Therefore, the lower bound for the trade price of cheese is 0.25 cars.

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