Trade at Negotiated Mid-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 10 containers of toys or 7 cases of wine. France can produce either 2 cases 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.

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. The mid-price for exchange between France and China can be calculated as follows. The mid-price for the number of containers of toys per case of wine is (10 containers+2 containers)2=6 containers of toys per 7 cases of wine. What happens to total production and consumption?(Click on the icon to import the table into a spreadsheet.)

Assumptions	Toys (Containers/Unit)	Wine (Cases/Unit)
China—output per unit of production input	10	7
France—output per unit of production input	2	7
China—total production inputs	1000
France—total production inputs	1000

a. What is the production and consumption of China and France without trade?

Calculate the production and consumption of China and France without trade below:(Round to the nearest integer.)

Production if there is no trade	Toys
CHINA
Allocated production units to
Produces and consumes (output per unit units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit units allocated)
Total production and consumption across both countries

Wine

b. Assume complete specialization, where China produces only toys and France produces only wine.

Calculate the production and consumption of China and France with complete specialization below:(Round to the nearest integer.)

Production if there is complete specialization	Toys
CHINA
Allocated production units to
Produces and consumes (output per unit units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit units allocated)
Total production and consumption across both countries

Wine

What would be the effect on total production?(Select the best choice below.)

A.The combined production of both countries is 10,000 containers of wine, 1,600 fewer containers of wine than before specialization, with toys production remaining unchanged.

B.The combined production of both countries is 10,000 containers of toys, 1,600 fewer containers of toys than before specialization, with wine production remaining unchanged.

C.The combined production of both countries is 10,000 containers of wine, 1,600 more containers of wine than before specialization, with toys production remaining unchanged.

D.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.

c. The mid-price for exchange between France and China can be calculated as follows. The mid-price for the number of containers of toys per case of wine is (10 containers+2 containers)2=6 containers of toys per 7 cases of wine. What happens to total production and consumption?

Assumptions	Toys (Containers/Unit)	Wine (Cases/Unit)
Chinaoutput per unit of production input	10	7
Franceoutput per unit of production input	2	7
Chinatotal production inputs	1,000
Francetotal production inputs	1,000

Calculate the total production and consumption across both countries for toys below:(Round to the nearest integer.)

TOYS
Trade at Negotiated Mid-Price (6 toys = 7 wine)	Production
CHINA
Allocated production units to
Produces and consumes (output per unit units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit units allocated)
Total production and consumption across both countries

Exports (-)

Imports (+)

Domestic

Consumption

Calculate the total production and consumption across both countries for toys below:(Round to the nearest integer.)

WINE
Trade at Negotiated Mid-Price (6 toys = 7 wine)	Production
CHINA
Allocated production units to
Produces and consumes (output per unit units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit units allocated)
Total production and consumption across both countries

Exports (-)

Imports (+)

Domestic

Consumption

What happens to total production and consumption?(Select all the choices that apply.)

A.China gains 800 more containers of toys (8,800 post-trade compared to 8,000 pre-trade), and enjoys the same level of wine consumption (1,400).

B.France gains 800 more containers of toys (1,200 post-trade compared to 400

pre-trade), and enjoys the same level of wine consumption (5,600).

C.Wine production therefore remains the same as before trade, but now the 1,600 increased production of toys is split evenly between the two countries.

D.Wine production therefore remains the same as before trade, but now the 1,600 decreased production of toys is split evenly between the two countries.