Question

Problems and applications q7 a german worker takes 400 hours to produce a car and 2 hours to produce a case of wine. a french worker takes 600 hours to produce a car and hours to produce a case of wine. for what values of will gains from trade be possible

Answer 1

Answer: a. 3

b. 1 and 2

Explanation:

a. Gains from trade are possible only when there are comparative advantages in production of a good. German worker takes 400 hours to produce a car and 2 hours to produce wine. While, a French worker takes 600 hours to produce cars and X hours to produce wine.

Opportunity cost of producing car for a Greman worker is

$400 cars = 2 wine case Opportunity cost of 1 car = \frac{400}{2} = 200$ wine case

Opportunity cost of producing wine for a German worker is

$1 car = 200 wine cases \frac{1}{200} cars = 1 wine case$

Gains from trade are possible only when the French worker face a different opportunity cost than the German worker for both the goods.

$200 < 600/X X$

Correct option is 3.

b. Germany will export cars and import wine only when it has a comparative advantage in producing cars and France has a comparative advantage in producing wine. This is possible when the opportunity cost of producing cars in Germany is smaller than that of France.

Opportunity cost of car in Germany < Opportunity cost of car in France  

$200 < 600/X X$

Therefore, when it take France less than 3 hours to produce a case of wine, Germany will import wine from France and export Cars to France.

Correct options as 1 and 2.