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France and Germany both produce wine and cars. In France, it requires 2 labour hours to produce one bottle of wine and 1,000 labour hours to produce one car. In Germany, it requires 10 labour hours to produce one bottle of wine and 500 labour hours to produce one car. To keep things simple, assume that each country is endowed with 10,000 labour hours. Currently under self-sufficiency, the two countries are choosing consumption of the two goods by allocating an equal amount of labour hours to each good.
a) Using straight lines, Illustrate the individual production possibility frontiers (PPF) on separate diagrams (measuring volume of cars on the horizontal axis and volume of wine on the vertical axis) for France and Germany and their current choice of wine and cars in each country. b) What is the opportunity cost of a car in France? What is the opportunity cost of a bottle of wine in France? What is the opportunity cost of a car in Germany? What is the opportunity cost of a bottle of wine in Germany?
c) Using the concepts of opportunity cost and comparative advantage, explain how trade can benefit both countries by showing
(i) what each country should produce and why and how many cars and bottles of wine will be produced in total.
(ii) consumption for both countries after trade assuming that Germany strikes a deal to sell 6 cars at a term of trade of 1 car for 200 bottles of wine.
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