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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

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 X hours to produce a case of wine.

a. For what values of X will gains from trade be possible? Explain.

b. For what values of X will Germany export cars and import wine? Explain.

Subpart (a):

To determine

The value of X to determine the gains from trade.

Explanation

Gains from trade are based on comparative advantage, which is based on opportunity cost. To gain from trade, one of the producers must have a comparative advantage in the production of a good.

The opportunity cost of 1 car in Germany is calculated as follows:

Opportunity cost carGermany=No. of labor hours for production of a carNo. of labor hours for production of a case of wine=4002=200 cases of wine

Similarly, the opportunity cost of 1 case of wine in Germany is calculated as,

Opportunity cost wineGermany=No

Subpart (b):

To determine

The value of X to determine the gains from trade.

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