Suppose two countries, France and Germany, use only capital and labor for production. Factor endowments of the nations are presented in the table below. Capital Labor France 2200 800 Germany 880 220 a Which country is labor-abundant? Which country is capital-abundant? b. Assume that both countries produce two goods, cars and wine. If cars are capital-intensive and wines are labor-intensive, which country should specialize in the production of cars? Which country should specialize in the production of wines? Explain why?

Economic theory suggests that we can increase productivity by:     Specializing according to absolute advantage.   Specializing according to comparative advantage.   Specializing according to either absolute or comparative advantage.   It is impossible to increase productivity

Which of the following is not true about the differences between comparative advantage and absolute advantages? While it is possible to achieve gains from trade if the country does not have a comparative advantage in the production of any goods, it is not possible to achieve gains from trade if the country does not have an absolute advantage in the production of any goods. Comparative advantage emphasizes the relative cost differences based on opportunity costs, while absolute advantage emphasizes absolute costs. In order to achieve gains from trade, specialization should be based on comparative advantage and not absolute advantage. In the two nation, two good model, we will always see that a country will have a comparative advantage in at least one good.

Consider two neighboring island countries called Euphoria and Bellissima. They each have 4 million labor hours available per week that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor. Country Rye Jeans (Bushels per hour of labor) (Pairs per hour of labor) Euphoria 4 16 Bellissima 6 12   Initially, suppose Bellissima uses 1 million hours of labor per week to produce rye and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce rye and 1 million hours per week to produce jeans. Consequently, Euphoria produces 12 million bushels of rye and 16 million pairs of jeans, and Bellissima produces 6 million bushels of rye and 36 million pairs of jeans. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of rye and…