Question

A (2x2) matrix involves (2 countries exchanging 2 commodities or products)

Matrix A

	Wheat (Labor hours/Unit of Output )	Steel (Labor hours/Unit of Output)
Germany	30	40
France	20	80

(Numerical values reflect labor hours per unit of output)

a. Will trade occur??? Identify the country having the advantage in wheat production and the one having the advantage in steel production.

b. Identify the production possibility frontiers for both countries.

c. Show me also the gains from trade.

Answer 1

Q(1)

Basically trade between the two countries occur only when one of the country has a specialty on producing product at low cost than other countries so trade is a way through which countries who are not able to produce some particular goods at low price can take it from other countries at lower cost and thus they can lower down their production cost and optimal utilization of the resources can be done. definitely by looking at the above-given data we can say trade will occur because the production cost varies between the two countries and thus in those countries who will have high production costs will import the required product from other countries having a low cost of production. so France is getting more benefits on producing per unit of wheat as compared to Germany whereas in the case of steel Germany will have more benefits because of their low labor hour requirement per unit of production.

Q(2) - Pdf attached

Q(3)

so if we will take the case of wheat production then definitely France will have better production benefits then Germany thus trade for wheat can occur between both the nations and as the production of per unit of wheat required 30 labor hour in Germany whereas it is just 20 labor hour in Frane and thus the total gain from trade will be in term of saving the labor hour by 10 hours per unit

while in the case of steel production Germany will have better production benefits then France thus trade for steel can occur between both the nations and as the production of per unit of steel required 80 labor hour in France whereas it is just 40 labor hour in Germany and thus the total gain from trade will be in term of saving the labor hour by 40 hours per unit