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Chap01 Pbms MBF12e

# Chap01 Pbms MBF12e - Problem 1.1 Production and Consumption...

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Problem 1.1 Production and Consumption What is the production and consumption of China and France without trade? Toys Wine Assumptions (containers/unit) (cases/unit) China -- output per unit of production input 10 7 France -- output per unit of production input 2 7 China -- total production inputs 1,000 France -- total production inputs 1,000 Production if there is no trade Toys Wine CHINA Allocated production units to 800 200 Produces and consumes (output per unit x units allocated) 8,000 1,400 FRANCE Allocated production units to 200 800 Produces and consumes (output per unit x units allocated) 400 5,600 Total production and consumption across both countries 8,400 7,000 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 containers 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.

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Problem 1.2 Specialization Toys Wine Assumptions (containers/unit) (cases/unit) China -- output per unit of production input 10 7 France -- output per unit of production input 2 7 China -- total production inputs 1,000 France -- total production inputs 1,000 Production if there is complete specialization Toys Wine CHINA Allocated production units to 1,000 - Produces and consumes (output per unit x units allocated) 10,000 - FRANCE Allocated production units to - 1,000 Produces and consumes (output per unit x units allocated) - 7,000 Total production and consumption across both countries 10,000 7,000 The combined production of both countries is 10,000 containers of toys, 1,600 more containers of toys than before specialization, with wine production remaining unchanged. Assume complete specialization, where China produces only toys and France produces only wine. What would be the effect on total production?
Problem 1.3 Trade at China's Domestic Price Toys Wine Assumptions (containers/unit) (cases/unit) China -- output per unit of production input 10 7 France -- output per unit of production input 2 7 China -- total production inputs 1,000 France -- total production inputs 1,000 TOYS WINE Toy Exports (-)/ Domestic Wine Exports (-)/ Domestic Trade at China's domestic price (10 toys = 7 wine) Production Imports (+) Consumption Production Imports (+) Consumption CHINA Allocated production units to 1,000 - Produces and consumes (output per unit x units allocated) 10,000 (2,000) 8,000 - 1,400 1,400 FRANCE Allocated production units to - 1,000 Produces and consumes (output per unit x units allocated) - 2,000 2,000 7,000 (1,400) 5,600 Total production and consumption across both countries 10,000 10,000 7,000 7,000 With complete specialization, toy production in total is increased as in Problem 2.

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Chap01 Pbms MBF12e - Problem 1.1 Production and Consumption...

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