Question

Trade at France's Domestic Price. 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 six times as efficient compared to France whern producing toys, but equally efficient when producing wine. Assume at first that no trade takes place. China allocates 850 production units to building toys and 150 production units to producing wine. France allocates 150 production units to building toys and 850 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 300 containers to France. Assume France in turn produces 7,000 cases of wine and exports 1,050 cases to China. What happens to total production and consumption? Calculate the production and consumption of China and France without trade below: (Round to the nearest integer.) Production if there is no trade CHINA Allocated production units to Produces and consumes (output per unit x units allocated) FRANCE Allocated production units to Produces and consumes (output per unit x units allocated) Total production and consumption across both countries Toys

Answer 1

a) Production and consumption of China & France without trade

China France

Production for toys 850 150

Production per unit 12 2

Total production for toys 10200 300

Production for wines 150 850

Production per unit 7 7

Total 1050 5950

b) If China produces only toys and Frnace produces only wines

Following production will be obtained

China 1000 production units * 12 toys = 12000 toys

France produces 1000 production units * 7 wines = 7000 wines

C) France domestic price of 2 containers of toys equals 7 cases of wine

Thus France will require 300 containers exported from China

Thus cases of wine to be exported 300/2 * 7 = 1050 wines

Thus Production and Consumption will be as follows

France China

Production

Toys - 12000

Wines 7000 -

Consumption

Toys 300 11700

Wines 5950 1050

Answer 2

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Answer 3

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