Table 1: Production Efficiency: Number of Units of Output per One Standardized Unit of Input
Wine Cheese
France 60 36
Germany 30 24
1.Which country should specialize in the production of Wine? Which country should specialize in the production of Cheese? Why? Calculate the comparative efficiency ratios for each product and write them in a table
2.What is the minimum amount of France’s specialized product that Germany would agree to import in exchange for an export of 48 units of its (Germany’s) specialized product, so Germany would benefit from trade? Briefly explain your answer
3.What is the maximum amount of France’s specialized product that France would be willing to export to Germany for an import of 48 units of Germany’s specialized product, so France would benefit from trade? Briefly explain your answer
4. Assume that each country used a total of 4 standardized units of input in production. Explain why would both countries benefit from specialization and trade (10).
a. Show calculations to indicate the global gain from trade (use table format to show pre- and post-specialization totals, assuming an even split of units of input before specialization). For after specialization and trade, use a scenario assuming that the two countries agreed to exchange 102 units of Wine for 72 units of Cheese. What would be the actual gain/loss for each country in terms of the units of Wine? Which country would the gain/loss out on Cheese? By how much?
b. Show in a table format by how much would each country benefit in terms of their units of input after specialization and trade.
c. Assume that in both countries the price of wine is 3 euros per unit and cheese is 4.25 euros per unit. Show tables and calculations to prove that global value of production and monetary gain for each country after specialization and trade has indeed increased.
1. To determine which country should specialize in the production of Wine and Cheese, we need to calculate the comparative efficiency ratios for each product. The comparative efficiency ratio is calculated by dividing the number of units of output by the number of standardized units of input.
Comparative Efficiency Ratios for Wine:
- France: 60 units of Wine / 1 unit of input = 60
- Germany: 30 units of Wine / 1 unit of input = 30
Comparative Efficiency Ratios for Cheese:
- France: 36 units of Cheese / 1 unit of input = 36
- Germany: 24 units of Cheese / 1 unit of input = 24
Based on the comparative efficiency ratios, France should specialize in the production of Wine because it has a higher ratio of 60 compared to Germany's ratio of 30. Germany, on the other hand, should specialize in the production of Cheese because it has a higher ratio of 24 compared to France's ratio of 36. This means that both countries can produce their specialized products more efficiently than the other.
Table of Comparative Efficiency Ratios:
Country | Wine | Cheese
-------------------------
France | 60 | 36
Germany | 30 | 24
2. To determine the minimum amount of France's specialized product (Wine) that Germany would agree to import in exchange for an export of 48 units of its specialized product (Cheese), we need to compare the opportunity costs. The opportunity cost measures the amount of one product that has to be given up to produce an additional unit of the other product.
The opportunity cost of producing Wine in Germany is 1 unit of Cheese per 2 units of Wine (24 units of Cheese / 48 units of Wine = 0.5 units of Cheese per unit of Wine). Therefore, for Germany to benefit from trade, France would need to offer at least 0.5 units of Cheese for each unit of Wine.
3. Similarly, to determine the maximum amount of France's specialized product (Wine) that France would be willing to export to Germany for an import of 48 units of Germany's specialized product (Cheese), we need to compare the opportunity costs.
The opportunity cost of producing Wine in France is 1.5 units of Cheese per unit of Wine (36 units of Cheese / 24 units of Wine = 1.5 units of Cheese per unit of Wine). Therefore, France would be willing to export up to 1.5 units of Cheese for each unit of Wine imported from Germany.
4. Both countries can benefit from specialization and trade because they can allocate their resources more efficiently by producing the goods in which they have a comparative advantage. Specialization allows each country to focus on producing the goods they can produce most efficiently, leading to increased total output and productivity.
a. To calculate the global gain from trade, we need to compare the pre-specialization and post-specialization totals of Wine and Cheese production.
Assuming an even split of units of input before specialization, each country would produce 50 units of Wine and 30 units of Cheese.
Pre-specialization totals:
- France: 50 units of Wine, 30 units of Cheese
- Germany: 50 units of Wine, 30 units of Cheese
After specialization and trade, let's assume France exports 102 units of Wine and imports 72 units of Cheese from Germany.
Post-specialization totals:
- France: (50 - 102) + 72 = 20 units of Wine
- Germany: (50 + 102) - 72 = 80 units of Wine
The actual gain/loss for each country in terms of Wine units would be:
- France: 20 - 50 = -30 units of Wine (losing)
- Germany: 80 - 50 = 30 units of Wine (gaining)
In terms of Cheese, France would gain 72 units, and Germany would lose 72 units.
b. To determine the benefit in terms of units of input after specialization and trade, we need to calculate the comparative efficiency ratios for Wine and Cheese for each country.
Comparative Efficiency Ratios after specialization and trade:
- France: 20 units of Wine / 4 units of input = 5 (Wine)
72 units of Cheese / 4 units of input = 18 (Cheese)
- Germany: 80 units of Wine / 4 units of input = 20 (Wine)
0 units of Cheese (Germany no longer produces Cheese)
Table of Comparative Efficiency Ratios after specialization and trade:
Country | Wine | Cheese
-------------------------
France | 5 | 18
Germany | 20 | 0
c. To prove that the global value of production and monetary gain for each country after specialization and trade has increased, we need to calculate the total value of production before and after specialization and trade.
Assuming the price of Wine is 3 euros per unit and Cheese is 4.25 euros per unit:
Before specialization and trade:
- France: (50 units of Wine x 3 euros) + (30 units of Cheese x 4.25 euros) = 150 euros + 127.5 euros = 277.5 euros
- Germany: (50 units of Wine x 3 euros) + (30 units of Cheese x 4.25 euros)= 150 euros + 127.5 euros = 277.5 euros
After specialization and trade:
- France: (20 units of Wine x 3 euros) + (72 units of Cheese x 4.25 euros) = 60 euros + 306 euros = 366 euros
- Germany: (80 units of Wine x 3 euros) = 240 euros
The global value of production has increased from 555 euros (before specialization and trade) to 606 euros (after specialization and trade). Both countries have gained monetarily from specialization and trade.