Germany and France can produce the amounts of wine and beer indicated in the table below with one unit of land. Each country has 10 units of land

Question

Does either country have an absolute advantage? Which country has a comparative advantage in beer production? Which country has a comparative advantage in wine production? Is it possible for the two countries to benefit from trade? Country Beer Wine France 2 4 Germany 10 1

Answer 1

With 10 units of land, Germany can produce 100 units of beer while France may only produce 20 units of beer. However, with 10 units of land, Germany may only produce 10 units of wine while France can produce 40 units of wine. Therefore Germany has an absolute advantage in beer, and France has an absolute advantage in wine. In Germany, the opportunity cost of beer is 0.1 units of wine. In France, the opportunity cost of beer is 2 units of wine. This implies that Germany has a comparative advantage in beer production. In France, the opportunity cost of wine is 0.5 units of beer in France. In Germany, the opportunity cost of wine is 10 units of beer. This implies that France has a comparative advantage in wine production. Depending upon preferences of the two countries, free trade may be beneficial. For example, if Germans were willing to exchange 4 units of beer for 1 unit of wine and the French were willing to exchange 1 unit of wine for 4 units of beer, both countries would be made better off by trade. As long as the cost of beer in terms of wine is between (0.1,0.5), the countries would be better off by trading.