Suppose that France and Germany both produce schnitzel and wine. The following t
ID: 1148717 • Letter: S
Question
Suppose that France and Germany both produce schnitzel and wine. The following table shows combinations of the goods that each country can produce in a day FRANCE WINE (BOTTLES) SCHNITZEL (kg) WINE (BOTTLES) SCHNITZEL (kg) GERMANY 15 12 4 0 4 5 a. Who has a comparative advantage in producing wine? Who has a comparative advantage in producing schnitzel? b. Suppose that France is currently producing one bottle of wine and 6 kg of schnitzel and Germany is currently producing three bottles of wine and 6 kg of schnitzel. Demonstrate that France and Germany can both be better off if they specialise in producing only one good and then engage in trade.Explanation / Answer
a) Opportunity cost of producing 1 bottle of wine in France = Total production of Schnitzels when all resources are used to produce the same/ Total production of Wine when all resources are used to produce the same = 8/4 = 2 kg (Schnitzels)
Similarly,
Opportunity cost of producing 1 bottle of wine in Germany = 15/5 = 3 kg Schnitzels
Since, France has a lower opportunity cost in production of wine bottles, it would have a comparative advantage in production of wine. Using a similar reasoning, Germany would have a comparative advantage in production of schnitzels.
b)
Total production of wine before specialization and trade = 1 + 3 = 4 bottles of wine
Total production of schnitzels before specialization and trade = 6 + 3 = 9 kg of schnitzels
After specialization:
Total production of wine (France produces only wine) = 4 bottles
Total production of schnitzels (Germany produces only schnitzels) = 15 kgs
It is clear that after specialization total production is more than the previous case and France and Germany both could benefit if 1 bottle of wine is exchanged for more than 2 kg of schnitzels but lower than 3 kg of schnitzels.