Trade at China's Domestic Price. This problem illustrates an example of trade induced by comparative advantage. It assumes 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 15 containers of toys or 6 cases of wine. France can produce either 3 cases of toys or 6 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 775 production units to building toys and 225 production units to producing wine. France allocates 225 production units to building toys and 775 production units to producing wine.
a. What is the production and consumption of China and France without trade?
b. Assume complete specialization, where China produces only toys and France produces only wine. What would be the effect on total production?
c. China's domestic price is 15 containers of toys equals 66 cases of wine. Assume China produces 15,000 containers of toys and exports 3375 to France. Assume France produces 6,000 cases of wine and exports 1,350 cases to China. What happens to total production and consumption?