tollowing table shows the production capabilities of them in produ ermany has 10
ID: 2803083 • Letter: T
Question
tollowing table shows the production capabilities of them in produ ermany has 100 production units and Prance has 50 production units. The ing two goods, computer and wine. Computer 3/production unit 1/productioin unit wine 3/production un 2/prófuction unit it e2 ermany low France 5 a. Which country has absolute advantage in computer production? Which country in wine production? in b. Which country has comparative advantage in computer production? Which country wine production? Suppose each country specializes in the production of the good in which it has comparative advantage. How much is the production of computers for the world (two countries combined)? The production of wine? c. Suppose each country does what is described in part c, and trade with the other country at the terms of trade of I computer for 1.5 wine. How many computers and wine each country has after specialization and trade? As you might know, there are many possible right answers for this part of the question. d.Explanation / Answer
Answer a)
This part is asking for absolute advantage
Absolute advantage means the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
So here it can be clearly seen that Germany has absolute advantage in producing both computer and wine.
As it is taking less production unit to make one unit of both item than France. Or we can say it is producing higher amount of computer and wine per production unit.
Answer b)
Now this part is asking for comparative advantage.
Comparative advantage means the ability of an individual, company or country to produce a good or service at a lower opportunity cost than its competitor. Having a comparative advantage doesn’t mean that one entity is better than another at producing a good or service. It means that it sacrifices less of other unit in order to produce one unit.
So now we will calculate opportunity cost for both items for respective country
Country
Computer
Wine
Germany
= 3 = 1
3
This means only one unit of wine is needed to be sacrificed in order to produce one unit of computer
= 3 = 1
3
This means only one unit of computer is needed to sacrificed in order to produce one unit of wine
France
= 2 = 2
1
This means 2 unit of wine is needed to be sacrificed in order to produce one unit of computer
= 1 = .5
2
This means only .5 unit of computer is needed to be sacrificed in order to produce one unit of wine
So after analyzing above table
We can say that
for computer
Germany is at comparative advantage in producing computers because it on sacrifice 1 unit of wine as compared to France who is sacrificing 2 unit. So Germany have less opportunity cost than France
for wine
France is at comparative advantage in producing Wine because it on sacrifice .5 unit of computer as compared to Germany who is sacrificing 1 unit. So France have less opportunity cost than Germany.
Answer c)
This question is basically asking for total number of unit both countries can produce if only single item is produced.
Computer
3*100 + 1*50 = 350 unit (if only computer is produced)
Wine
3*100 + 2*50 = 400 unit (if only wine is produced)
Answer d)
If each country produces only the item in which they specializes and trade for other
Option 1 (No trade)
Computer Wine
Germany 300 unit 0unit
France 0 unit 100 unit
Option 2 (Full trade)
Computer Wine
Germany 233.33 unit 100 unit
France 66.67 unit 0 unit
Option 3 (Partial trade)
There can be many combination
(randomly assuming one) i.e. trading one 45 wine for 30 computer
Computer Wine
Germany 270 unit 45unit
France 30 unit 55 unit
Country
Computer
Wine
Germany
= 3 = 1
3
This means only one unit of wine is needed to be sacrificed in order to produce one unit of computer
= 3 = 1
3
This means only one unit of computer is needed to sacrificed in order to produce one unit of wine
France
= 2 = 2
1
This means 2 unit of wine is needed to be sacrificed in order to produce one unit of computer
= 1 = .5
2
This means only .5 unit of computer is needed to be sacrificed in order to produce one unit of wine
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