Suppose Germany and France each produce only two goods, guns and butter. Both are produced using labor alone. Assuming both countries are at full employment, you are given the following information: Germany: 10 units of labor required to produce 1 gun 5 units of labor required to produce 1 pound of butter Total labor force: 1,000,000 units
France: 15 units of labor required to produce 1 gun 10 units of labor required to produce 1 pound of butter Total labor force: 750,000 units
a. Draw the production possibility frontiers for each country in the absence of trade.
b. If transportation costs are ignored and trade is allowed, will France and Germany engage in trade? Explain.
c. If a trade agreement was negotiated, at what rate (number of guns per unit of butter) would they agree to exchange?