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RiskManagementandDerivatives(723G33)

ANOUAR SOLDI
Assumptions
Prod. Units
China (C)
France (F)

1,000
1,000

Toys
(cont/unit)
10
2

Wine
(case/unit)
7
7

1. Production and Consumption. What is the production and


consumption of China and France without trade?
Production without trade
Toys
China
10x800=8,000
France
2x200= 400
7x800=5,600
Total prodct & conspt (F+C)
7,000

Wine
7x200=1,400

8,400

2. Specialization. Assume complete specialization, where China


produces only toys and France produces only wine. What
would be the effect on total production?
China
France

10x1,000= 10,000 toys


7x1,000= 7,000 wine

After specialization the total production of toys is 10,000


compared to 8,400, thus it will be produced 1,600 more
containers of toys, whereas the production of wine will remain
the same 7,000.
3. Trade at Chinas Domestic Price. 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 happens to total
production and consumption?
Toys
Prod Exp
C
F

Dom

Wine
Prod Exp

Dom

10,000 2,000 8,000


7,000 1,400 5,600

Compared to the production and consumption before trade,


France consumption of toys increases from 400 containers to
2,000 containers, thus an increase of 1,600 containers, while
in the case of wine the quantity remains the same.
Chinas production and consumption of toys and wine remains
at the same levels before and after trade.
Thus the trade benefits France.
4. Trade at Frances Domestic Price. 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
happens to total production and consumption?

C
F

Toys
Prod Exp

Dom

10,000 400

9,600

Prod

Wine
Exp

Dom

7,000 1,400 5,600

In the case of China the production and consumption of toys


after trade rises to 9,600 containers up with 1,600
containers compared to before trade production and
consumption, while France remains at the same level, 400
containers.
In case of wine production and consumption the levels remain
the same as to prior to trade.
Therefore China is benefiting from trading at the levels of
Frances domestic prices.
5. Trade at Negotiated Mid-price. What happens to total
production and consumption?
Toys
Prod Exp
C
F

Dom

Wine
Prod Exp

Dom

10,000 1,200 8,800


7,000 1,400 5,600

Compared to the situation prior to trade China increases with


800 containers of toys- from 8,000 containers of toys prior to
8,800 post-trade, while the wine level remains the same.
France post-trade has 800 containers of toys more, from 400
to 1,200, while the level of wine remains the same.

At the negotiated mid-price the 1,600 containers of toys


(10,000 production + consumption after trade - 8,400 prior to
trade) are divided equally between the two countries.