Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 3 - Part I - Interdependence and the Gains from Trade - Problems and Applications - Page 61: 7

Answer

a) As long as $0\ne X$ and $X \ne 3$, trade will be possible. b) Germany would export cars and import wine when $0\lt X \lt3$.

Work Step by Step

a) If $X=0$, then French workers would not make any wine. If $X=3$, then French workers would make a case of wine in three hours. If $X=3$, then the opportunity costs for German and French workers would be the same. Assuming $X=3$, then the opportunity cost for a German worker to make a car is 200 cases of wine (and the opportunity cost of making a case of wine is 1/200 cars). Also, the French worker would have the same opportunity costs. If we let $X=4$, then the opportunity cost for a French worker to make a car is 150 (600/4) cases of wine, and the opportunity cost to make a case of wine is 1/150 (4/600) cars. At this level, German workers would have the comparative advantage in making cases of wine, and French workers would have the comparative advantage in making cars. If we let $X=2$, the opportunity costs for German workers stay constant. However, the opportunity cost for a French worker to make a car is 300 (600/2) cases of wine, and the opportunity cost to make a case of wine is 1/300 (2/600) cars. At this level, German workers would have the comparative advantage in making cars, and French workers would have the comparative advantage in making cases of wine. b) At $X=3$, both German and French workers would have the same opportunity costs, so trade wouldn't make either side better off. With $X=4$, German workers would have the comparative advantage in making cases of wine, and French workers would have the comparative advantage in making cars. Thus, German workers would trade wine for French cars. With $X=2.99$, the opportunity costs for German workers stay constant. However, the opportunity cost for a French worker to make a car is 200.67 (600/2.99) cases of wine, and the opportunity cost to make a case of wine is .00498 (2.99/600) cars. German workers would still have the comparative advantage in making cars, and French workers would still have the comparative advantage in making wine.
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