Suppose that China and Germany each have 1,000,000 labour hours available for the production of cell phones and computers. The number of labour hours needed to produce cell phones and computers in China and Germany are given in the table below:
Cell Phones Computers
China 5 10
Germany 10 15
1. Which country has comparative advantage in the production of Cell Phones? Which country has comparative advantage in the production on Computers? Explain.
2. If transportation costs are ignored and trade is allowed, will China and Germany engage in trade? Illustrate your answer using a specific trade strategy, that is, (a) production of computers and cell phones in Germany; (b) production of computers and cell phones in China; and (c) the terms of trade (the rate at which cell phones are exchanged for computers) that will lead to a mutually beneficial trade. Finally, illustrate how China and Germany move beyond their respective production possibilities curves when they engage in trade.