Suppose France and Portugal produce only cloth and wine. Assume that each countr

Question

Suppose France and Portugal produce only cloth and wine. Assume that each country uses only labor to produce each good and that the cloth and wine made in France and Portugal are exactly alike. The table below shows how much each country can produce of each good with one hour of labor: Suppose that France and Portugal do not trade with each other. Each has 100 hours of labor with which to produce cloth and wine, and the countries are currently producing amounts of each good shown in the table below: Assume now that each country specializes in producing that good in which it has a comparative advantage. Further, assume for simplicity that one unit of cloth can be traded for one unit of wine. If France trades 120 units of cloth for 120 units of wine with Portugal then, with trade, France will be able to consume the same amount of wine and additional units of cloth (enter a numeric response using an integer), and Portugal will be able to consume the same amount of cloth and additional units of wine.

Explanation / Answer

With one hour of labor, France can produce either 18 units of cloth or 12 units of wine.

So, the opportunity cost of producing one unit of cloth is (12/18) 0.66 units of wine and the opportunity cost of producing one unit of wine is (18/12) 1.5 units of cloth.

With one hour of labor, Portugal can produce either 3 units of cloth or 9 units of wine.

So, the opportunity cost of producing one unit of cloth is (9/3) 3 units of wine and the opportunity cost of producing one unit of wine is (3/9) 0.33 units of cloth.

France has lower opportunity cost in production of cloth and thus have comparative advantage in production of cloth and will specialize in its production.

Portugal has lower opportunity cost in production of wine and thus have comparative advantage in production of wine and will specialize in its production.

France can produce 18 units of cloth in one hour. So, with 100 hours, it can produce 1,800 units of cloth.

Portugal can produce 9 units of wine in one hour. So, with 100 hours, it can produce 900 units of wine.

If France trades 120 units of cloth for 120 units of wine with Portugal then after trade France will left with (1,800 – 120) 1,680 units of cloth while Portugal will left with (900 – 120) 780units of wine.

At present France consume 1,620 units of cloth. However, by specializing and trading it would be able to consume 1,680 units of cloth. Thus, there is consumption of 60 additional units of cloth by France.

At present, Portugal consumes 540 units of wine. However, by specializing and trading, it would be able to consume 780 units of wine. Thus, there is consumption of 240 additional units of wine by Portugal.

So, with trade, France will be able to consume the same amount of wine and 60 additional units of cloth, and Portugal will be able to consume same amount of cloth and 240 additional units of wine.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.