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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.

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 3, Problem 7PA
Textbook Problem
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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 of Solution

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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