no idea what to do guys, little help please
11. Answer the next three questions on the basis of the following production possibilities data for Francia and Galacia. All data are in tons.
Francia production possibilities:
A B C D E
Soup 60 45 30 15 0
Nuts 0 15 30 45 60
Galacia production possibilities:
A B C D E
Soup 20 15 10 5 0
Nuts 0 15 30 45 60
(a) If trade occurs between Francia and Galacia, which nation should export what product? Why? 2 points
(b) What are the limits of the terms of trade between Francia and Galacia? 1 point
(c) Assume that prior to specialization and trade, Francia and Galacia chose production possibility “C.” Now each specializes according to comparative advantage. What will be the resulting gains from trade? Explain your answer. 2 points
(a) In order to determine which nation should export what product, we need to compare the opportunity costs of producing Soup and Nuts in both Francia and Galacia.
To calculate the opportunity cost, we can divide the amount of one good that can be produced by the amount of the other good that is given up.
For Francia, the opportunity cost of producing Soup is calculated as follows:
Opportunity cost of Soup = Nuts produced / Soup given up
Opportunity cost of Soup for Francia = 15 tons / 45 tons
Opportunity cost of Soup for Francia = 1/3
For Galacia, the opportunity cost of producing Soup is calculated as follows:
Opportunity cost of Soup = Nuts produced / Soup given up
Opportunity cost of Soup for Galacia = 15 tons / 5 tons
Opportunity cost of Soup for Galacia = 3
Comparing the opportunity costs, we can see that the opportunity cost of producing Soup is lower for Francia (1/3) compared to Galacia (3). This indicates that Francia has a comparative advantage in Soup production.
Similarly, we can calculate the opportunity costs for Nuts:
Opportunity cost of Nuts for Francia = Soup produced / Nuts given up
Opportunity cost of Nuts for Francia = 45 tons / 15 tons
Opportunity cost of Nuts for Francia = 3
Opportunity cost of Nuts for Galacia = Soup produced / Nuts given up
Opportunity cost of Nuts for Galacia = 15 tons / 15 tons
Opportunity cost of Nuts for Galacia = 1
Comparing the opportunity costs, we can see that the opportunity cost of producing Nuts is lower for Galacia (1) compared to Francia (3). This indicates that Galacia has a comparative advantage in Nuts production.
Based on the comparative advantage, Francia should export Soup and Galacia should export Nuts.
(b) The limits of the terms of trade between Francia and Galacia are determined by the range of exchange rates that would be acceptable to both nations. In other words, it is the range within which both nations find it mutually beneficial to trade.
In this case, the limits of the terms of trade will depend on the relative demand for Soup and Nuts in both nations. If the demand for Soup is higher in Galacia and the demand for Nuts is higher in Francia, then the terms of trade will be more favorable for Galacia when they export Soup and Francia when they export Nuts.
(c) Assuming that Francia and Galacia each specialize according to their comparative advantage, the resulting gains from trade will be a more efficient allocation of resources and increased production levels.
By specializing in the production of the good they have a comparative advantage in, both nations can achieve higher levels of production and trade for the good they do not specialize in. This leads to an increase in total output and efficiency.
For example, if Francia specializes in Soup production and exports it to Galacia, while Galacia specializes in Nuts production and exports it to Francia, both nations can benefit from consuming more of the other good without having to produce it themselves. This allows each nation to enjoy a greater variety of goods and services, leading to higher living standards.
Overall, the gains from trade arise from the ability to specialize and trade according to comparative advantage, which allows for a more efficient allocation of resources and increased production levels.
To find the answers to these questions, let's analyze the provided production possibilities data for Francia and Galacia.
(a) To determine which nation should export what product in a trade scenario, we need to compare their respective opportunity costs. The nation with a lower opportunity cost for a particular product should specialize in producing and exporting that product.
Opportunity cost refers to the value of the next best alternative that must be given up when a decision is made. In this case, we can calculate the opportunity cost by dividing the change in the quantity of one product by the change in the quantity of the other product. The product with the lower opportunity cost is the one in which the nation has a comparative advantage.
Let's calculate the opportunity cost for each product in both Francia and Galacia:
- Francia's opportunity cost:
- For Soup: (Change in Nuts / Change in Soup) = (15-0) / (30-15) = 15/15 = 1
- For Nuts: (Change in Soup / Change in Nuts) = (30-15) / (15-0) = 15/15 = 1
- Galacia's opportunity cost:
- For Soup: (Change in Nuts / Change in Soup) = (15-0) / (10-5) = 15/5 = 3
- For Nuts: (Change in Soup / Change in Nuts) = (10-5) / (15-0) = 5/15 = 1/3
Comparing the opportunity costs, we see that Francia has a lower opportunity cost for Soup (1) compared to Galacia's opportunity cost for Soup (3). Conversely, Galacia has a lower opportunity cost for Nuts (1/3) compared to Francia's opportunity cost for Nuts (1).
Hence, Francia should export Soup, while Galacia should export Nuts. Francia has a comparative advantage in Soup production because its opportunity cost is lower, and Galacia has a comparative advantage in Nuts production due to its lower opportunity cost.
(b) The limits of the terms of trade between Francia and Galacia can be determined by comparing the opportunity costs of the same product in both nations. In a trade, the terms of trade will be mutually beneficial if they lie between the opportunity costs of the two nations.
In this case, Francia's opportunity cost for Soup is 1, and Galacia's opportunity cost for Soup is 3. The terms of trade will be beneficial to both nations as long as the exchange rate lies between 1 and 3. The terms of trade represent the ratio at which the countries can exchange one product for another.
(c) If both Francia and Galacia specialize according to their comparative advantage, they will produce and export the products in which they have a lower opportunity cost.
Assuming they initially chose production possibility "C" (30 tons of Soup and 30 tons of Nuts), Francia will specialize in Soup production and Galacia will specialize in Nuts production. After specialization and trade, each nation will gain from trade because they will be able to obtain more of the product they couldn't produce efficiently (as indicated by their higher opportunity cost).
By specializing, Francia can allocate more resources to Soup production, increasing their total output of Soup. Galacia can allocate more resources to Nuts production, increasing their total output of Nuts. Both nations can then trade their excess products, resulting in a more efficient allocation of resources and an increase in the overall output of both products.
These gains from trade are based on the principle of comparative advantage, where nations specialize in producing goods in which they have a lower opportunity cost, leading to increased efficiency and overall higher output.