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Economics 01

The document discusses comparative advantage and gains from trade between countries. It addresses several statements regarding comparative advantage and whether they are true or false. It also provides an example comparing the labor hours it takes a German and French worker to produce cars and wine. For gains from trade to be possible, the number of hours it takes the French worker to produce a case of wine (X) cannot equal 3 hours or more. If X is less than 3 hours, Germany will have a comparative advantage in cars and export them, importing wine from France.

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Ayesha Rehman
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141 views2 pages

Economics 01

The document discusses comparative advantage and gains from trade between countries. It addresses several statements regarding comparative advantage and whether they are true or false. It also provides an example comparing the labor hours it takes a German and French worker to produce cars and wine. For gains from trade to be possible, the number of hours it takes the French worker to produce a case of wine (X) cannot equal 3 hours or more. If X is less than 3 hours, Germany will have a comparative advantage in cars and export them, importing wine from France.

Uploaded by

Ayesha Rehman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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BUSINESS ECONOMICS

ASSIGNMENT. NO. 1

1. Are the following statements true or false? Explain in each case.

a. “Two countries can achieve gains from trade even if one of the countries has an absolute
advantage in the production of all goods.”
The statement is true and the only condition necessary for the statement is that each country
should have a comparative advantage in some good.

b. “Certain very talented people have a comparative advantage in everything they do.”
The statement is not true because one cannot have a comparative advantage in everything.
Comparative advantage is a relative concept and hence reflects the opportunity cost of one
good or activity in terms of another. If one has comparative advantage in one thing, he/ she
have a comparative disadvantage in the other thing.

c. “If a certain trade is good for one person, it cannot be good for the other one.”
The statement is not true because trades can and provide benefit to both sides especially trades
based on comparative advantage. If both sides did not get benefit, trades would never occur.

d. “If a certain trade is good for one person, it is always good for the other one.”
The above statement is false. To be good for both parties the trade price must lie between
the two opportunity costs.

e. “If trade is good for a country, it must be good for everyone in the country”
The above statement is false because trade that makes country better off can harm certain
individuals in the country like if a country has comparative advantage in producing cars and
comparative disadvantage in producing wheat. Exporting cars and importing wheat will overall
benefit the nation because it will able to consume more of both goods but introduction of trade
will be harmful to farmers and other people involved.

2. 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.


German worker takes = 400 hours (to produce a car)
German worker takes = 2 hours (to produce a case of wine)
whereas,
French worker takes = 600 hours (to produce a car)
French worker takes = X hours (to produce a case of wine)
So, X ≠ 3
The cost of all goods is lower in Germany than in France in the sense that all of the goods can be
produced with fewer work hours. The gain of trade is possible only when X is not equal to 3 or
more than 3 and trades are possible when comparative advantage exists. OC of 1 car is 200 case
of wine in Germany whereas 1 case of wine has OC of 1/200 car. In this case both countries have
no comparative advantage. Comparative advantage will exist only when X ≠ 3 or less than 3.

b. For what values of X will Germany export cars and import wine? Explain.
So, X < 3 in that case only Germany will export car and import wine because Germany has the
comparative advantage to export car and France has advantage in exporting wine. As it is known
that OC of 1 car is 200 case of wine in Germany and when X is less than 3 OC of one car in
France is greater than 200 case of wine.

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