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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.
Principles of Macroeconomics (Mind...
Principles of Macroeconomics (Mind...
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):
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:
Similarly, the opportunity cost of 1 case of wine in Germany is calculated as,
Subpart (b):
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