Question

The United States and France both enjoy wine and pasta and currently each country produces both goods. France can produce 10,000 pounds of pasta or 15,000 bottles of wine per month. The U.S. can produce 24,000 pounds of pasta or 18,000 bottles of wine per month.

a. Does either country have an absolute advantage at producing wine or pasta?

b. Calculate the comparative advantage for both countries for pasta and wine.

c. Explain who should specialize in producing wine and who should specialize in producing pasta.

d. If instead the U.S. could produce 100,000 pounds of pasta and 150,000 bottles of wine, should they still trade with France?

Answer 1

(a)

France can produce 10,000 pounds of pasta or 15,000 bottles of wine per month.

US can produce 24,000 pounds of pasta or 18,000 bottles of wine per month.

United States can produce greater amount of both pasta and wine relative to France.

So,

United States have an absolute advantage at producing wine and pasta.

(b)

For France, the opportunity cost of producing 1 pound of pasta is (15,000/10,000) 1.5 bottles of wine and the opportunity cost of producing 1 bottle of wine is (10,000/15,000) 0.67 pounds of pasta.

For United States, the opportunity cost of producing 1 pound of pasta is (18,000/24,000) 0.75 bottles of wine and the opportunity cost of producing 1 bottle of wine is (24,000/18,000) 1.33 pounds of pasta.

France can produce wine at lower opportunity cost relative to US.

US can produce pasta at lower opportunity cost relative to France.

So,

France has comparative advantage in production of wine.

US has comparative advantage in production of pasta.

(c)

A country should specialize in production of that good in which it has comparative advantage.

So,

France should specialize in producing wine.

United States should specialize in producing pasta.

(d)

Now, United States can produce 100,000 pounds of pasta and 150,000 bottles of wine.

The opportunity cost of producing 1 pound of pasta is (150,000/100,000) 1.5 bottles of wine and the opportunity cost of producing 1 bottle of wine is (100,000/150,000) 0.67 pounds of pasta.

It can be seen that after change in production structure, the opportunity cost of producing both goods is same in both countries.

So, both countries can produce both goods in equal terms and no one has comparative advantage in production of any good.

Thus,

United States should not trade with France.