Question: This question illustrates an example of trade induced by comparative advantage. Assume that China and France each have 1,000 production units. With one unit of

This question illustrates an example of trade induced by comparative advantage. Assume that China and France each have 1,000 production units. With one unit of production (a mix of land, labor, capital, and technology), China can produce either 10 containers of toys or 7 cases of wine. With one unit of production, France can produce either 2 cases of toys or 7 cases of wine. Thus, a production unit in China is five times as efficient compared to France when producing toys, but equally efficient when producing wine. Assume at first that no trade takes place. China allocates 800 production units to building toys and 200 production units to producing wine. France allocates 200 production units to building toys and 800 production units to producing wine.

(a) What is the production and consumption of China and France without trade?(b) Assume complete specialization, where China produces only toys and France produces only wine. What would be the total production?
(c) Chinas domestic price is 10 containers of toys equals 7 cases of wine. Assume China produces 10,000 containers of toys and exports 2,000 containers to France. Assume France produces 7,000 cases of wine and exports 1,400 cases to China. What will be to total production and consumption?
(d) Frances domestic price is 2 containers of toys equals 7 cases of wine. Assume China produces 10,000 containers of toys and exports 400 containers to France. Assume France in turn produces 7,000 cases of wine and exports 1,400 cases to China. What will be the total production and consumption?
(e) Assume France and China negotiate a price for trading toys in exchange for wine. They settle for the mid-point price (in this case, 6 toys per 7 wines). What will be the total production of each country? What will be the consumption of each country?

Assumptions Toys (containers/unit) Wine (cases/unit) Output per unit of production 10 input- China Output per unit of production input- France Total production inputs- China 1000 Total production inputs- France 1000

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