ECO 270 A2

1. Use the information in the table on labor productivities in France and Germany to answer questions a through f.

Output per Hour Worked

France

Germany

Cheese

2 kilograms

1 kilogram

Cars

0.25

0.5

a. Which country has an absolute advantage in cheese? In cars?

b. What is the relative price of cheese in France if it does not trade? In Germany?

c. What is opportunity cost of cheese in France? In Germany?

d. Which country has a comparative advantage in cheese? In cars? Explain your answer.

e. What are the upper and lower bounds for the trade price of cheese?

f. Draw a hypothetical PPC for France and label its slope. Suppose that France follows its comparative advantage in deciding where to produce on its PPC. Label its production point.If the trade price of cars is 5 kilograms of cheese per car, draw a trade line (CPC) showing how France can gain from trade.

2. Prasch’s article presents a critique of the theory of comparative advantage and the policy of laissez-faire that has generally been built upon it. Discuss his main arguments.