Question

. Germany and France are assumed to produce only wheat and cheese.

The coefficients of labor use required to produce one unit of each product in each country are given below (Assume both commodities are measured in tons). France has 800 days of labor and Germany has 1200 days of labor

	France	Germany
Wheat	4	2
Cheese	2	6

1. Which country has the absolute advantage in the production of cheese? Explain your answer.

2. Which country has the absolute advantage in the production of wheat? Explain your answer

3. Which country has the comparative advantage in the production of cheese? Explain

4. Which country has the comparative advantage in the production of wheat? Explain

5. Explain whether or not Germany and France will trade with each other, and if so, what each country will specialize in, and what happens to the prices of wheat and cheese in each country after trade.

Answer 1

France can produce 800/4 =200 wheat or 800/2=400 cheese.

Germany can produce 1200/2=600 wheat or 1200/6=200 cheese.

1. France has an absolute advantage in producing cheese because the quantity of cheese that can be produced by France in absolute terms is greater than Germany.

2. Germany has an absolute advantage in producing wheat because Germany can produce more wheat in absolute terms than France.

3. Opportunity cost of producing wheat

in France = 400/200cheese=2 cheese.

For Germany = 200/600 cheese = 1/3 cheese.

Opportunity cost of producing cheese in

France =200/400 wheat =1/2 wheat.

Germany =600/200 wheat = 3 wheat.

Because the opportunity cost of producing cheese is more for Germany, France has a comparative advantage in producing cheese.

4. Because France has a higher opportunity cost in producing wheat, Germany has the comparative advantage in wheat production.