Suppose Italian workers can produce 4 cars per year and German workers can produce 8 cars per year. Suppose Italian workers can produce 5 tons of garments per year and German workers can produce 6 tons of garments per year. Trade between Italy and Germany would lead to?Group of answer choicesEmployment gains in Italian car manufacturingExports of cars from Germany to ItalyLower relative price of cars in GermanyLower relative price of garments in Italy
Question
Suppose Italian workers can produce 4 cars per year and German workers can produce 8 cars per year. Suppose Italian workers can produce 5 tons of garments per year and German workers can produce 6 tons of garments per year. Trade between Italy and Germany would lead to?Group of answer choicesEmployment gains in Italian car manufacturingExports of cars from Germany to ItalyLower relative price of cars in GermanyLower relative price of garments in Italy
Solution
The question is asking about the potential outcomes of trade between Italy and Germany given the productivity of workers in each country in producing cars and garments.
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Employment gains in Italian car manufacturing: This is unlikely. Given that German workers can produce more cars per year than Italian workers, Germany has a comparative advantage in car production. This means that Germany can produce cars at a lower opportunity cost than Italy. If trade were to occur, it would be more efficient for Germany to specialize in car production, which could potentially lead to employment losses in Italian car manufacturing.
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Exports of cars from Germany to Italy: This is likely. As mentioned above, Germany has a comparative advantage in car production. Therefore, it would be more efficient for Germany to specialize in car production and export cars to Italy.
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Lower relative price of cars in Germany: This is also likely. If Germany specializes in car production, the increased supply of cars could lead to a lower relative price of cars in Germany.
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Lower relative price of garments in Italy: This is likely. Given that Italian workers can produce more tons of garments per year than German workers, Italy has a comparative advantage in garment production. This means that Italy can produce garments at a lower opportunity cost than Germany. If trade were to occur, it would be more efficient for Italy to specialize in garment production, which could potentially lead to a lower relative price of garments in Italy.
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