Reference no: EM131679440

Question: They assume 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.

Trade at Negotiated Mid-Price. The mid-price for exchange between France and China can be calculated as follows. What happens to total production and consumption?

Asumptions                          Toys(containers/unit)            Wine(cases/unit)

China-output per unit                      10                                      7
of production input

France-output per unit                     2                                       7
of production input

China-total production                  1,000
inputs

France-total production                1,000
inputs