Comparative Advantage

Problems 1–5 illustrate an example of trade induced by comparative

advantage.
They assume that China and France each have 1,000 production units.
With one unit of production (a mix of land, labor, capital, and technology),
China can produce either 10 containers of toys or 7 cases of wine. France
can produce either 2 cases of toys or 7 cases of wine. Thus, a production
unit in China is five times as efficient compared to France when producing
toys, but equally efficient when producing wine. Assume at first that no
trade takes place. China allocates 800 production units to building toys and
200 production units to producing wine. France allocates 200 production
units to building toys and 800 production units to producing wine.
1. Production and Consumption. What is the production and consumption
of China and France without trade?
2. Specialization. Assume complete specialization, where China produces
only toys and France produces only wine. What would be the effect on total
production?
3. Trade at China’s Domestic Price. China’s 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?