Question

Assume a simple model with only two countries: Spain and France, and two goods: wine and bread. The table below shows combinations of goods that each country could produce using all of its resources. Which nation would benefit from specializing in the production of bread and trading bread for wine with the other nation?

Spain - Wine Spain - Bread France - Wine France - Bread
150 0 90 0
100 25 60 60
50 50 30 120
0 75 0 180

Select the correct answer below:
a. France
b. Spain
c. neither nation has a comparative advantage in bread
d. both nations have a comparative advantage in bread

Answer 1

France (option a) has a lower opportunity cost than Spain for producing bread, indicating that it holds the comparative advantage. Hence, France would benefit by specializing in bread production and trading with Spain for wine.

Step-by-step explanation:

In the given model with Spain and France producing wine and bread, we need to determine which nation would benefit from specializing in the production of bread. To find this, we look at the opportunity cost for each country to produce bread versus wine. Spain's production capabilities show that as it produces more bread and less wine, the opportunity cost of producing bread (in terms of foregone wine) increases. At the extreme, Spain can produce 75 bread at the cost of producing 150 wine. Therefore, Spain would need to give up 2 units of wine to produce 1 unit of bread.

In France's case, for every 60 units of bread produced instead of wine, they give up 60 units of wine. This means that for France, the opportunity cost of one unit of bread is 1 unit of wine.

Comparative advantage is determined by which country has the lower opportunity cost for a good. Since France has a lower opportunity cost (1:1) compared to Spain (2:1) for producing bread, France has the comparative advantage in bread production. Therefore, France would benefit from specializing in the production of bread and trading it for wine with Spain.