Consider the U.S economy compared to a European economy such as Germany. The data tell us that in the U.S, real GDP and real consumption (per person) are higher than in Germany. Moreover, Germans enjoy signi?cantly more vacation time each year (6 weeks vacation per year in Germany compared to 2 weeks in the U.S.). We are going to use our one-period model from Chapter 5 to explain the divergences between these two economies. Answer the following questions:
(a) Assume that the two economies are identical except for their preferences over consumption and leisure. Draw one PPF, and show where on the PPF the U.S. equilibrium is relative to the German equilibrium. Make sure these points are consistent with the data described above.
(b) Would either economy be better o? moving towards the other? Explain why or why not?
(c) Now assume that preferences are the same between the two countries, but their PPFs are deferent. What are possible explanations (in our model, i.e. divergences in z, G, K, etc.) for the divergences in consumption and vacation time described above? Draw the two country’s PPFs and their associated equilibrium point based on your explanation.