Question

Suppose that in an hour a German worker can produce 200 clothes or 20 cars, while a Japanese worker can produce 150 clothes or 10 cars. Each country has 8 hours available.      

(c) If these countries were open to trade, which country would export clothes? (1 mark) Explain.(2 marks)

(d) At what price should the two countries trade? (2 marks) Explain.(2 marks)

Answer 1

Country	Clothes per worker per hour	Cars per worker per hour
German	200	20
Japanese	150	10

• Clothes per worker per hour

German worker takes 0.005 (1/200) hours to make one cloth. At the same time, Japanese worker takes 0.0067 (1/150) hours to make one cloth. Hence, it is clear that if the German Worker is manufacturing clothes, then it will be more beneficial as German worker is availing fewer hours for manufacturing clothes when compared to Japanese worker.

• Cars per worker per hour

German worker takes 0.05 (1/20) hours to make one car. At the same time, Japanese worker takes 0.10 (1/10) hours to make one car. Hence, it is clear that if the German Worker is manufacturing cars, then it will be more beneficial as German worker is availing fewer hours for manufacturing cars when compared to Japanese worker.

• If these countries were open to trade, which country would export clothes?

From the above we can see that the opportunity cost for producing a cars is higher when the work done by Japanese worker when compared to German worker. Thus German worker has a comparative advantage in cars production.

   While manufacturing clothes, it is more advantageous when the work is done by German worker.

Therefore in short it is more economical when German worker manufactured cloth and Japanese worker manufactured cars.

Thus, Germany would export Cars. Japan will export Clothes.

• At what price should the two countries trade?

A city will remain no worse -off from trade if its terms and conditions of trade are higher than or equal to the domestic prices of the same two goods before opening up to trade.

Therefore German, who exports cars will agree to trade only if the price of car is more than or equal to that proportion of clothes. Similarly Japan, who will import cars will only agree to trade if the price of car is less than or equal to that much proportion of clothes.