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Trade at China's Domestic 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 12 containers of toys or 7 cases of wine. France can produce either 3 cases of toys or 7 cases of wine. Thus, a production unit in China is four 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. China's domestic price is 12 containers of toys equals 7 cases of wine. Assume China produces 12,000 containers of toys and exports 2,400 to France. Assume France produces 7,000 cases of wine and exports 1,400 cases to China What happens to total production and consumption? Domestic WINE Exports (-) Imports (+) Trade at China's domestic price (12 toys = 7 wine) Production Consumption CHINA Allocated production units to Produces and consumes FRANCE Allocated production units to Produces and consumes Total production and consumption across both countries What happens to total production and consumption? (Select all the choices that apply) A. With complete specialization, toy production in total is increased as in question (b). B. Toy production and consumption in France increases from 600 containers of toys before trade to 2,400 containers after trade, a gain in consumption of 1,800 containers C. Wine production and consumption remains the same as before trade. China is now consuming 9,600 containers of toys and 1,400cases of wine, the same levels of both as prior to trade. Hence all of the benefits of trade have gone to France. O c. Wine production and consumption remains the same as before trade China is now consuming 9,600 containers of toys and 1,400cases of wine, the same levels of both as prior to trade. Hence all of the benefits of trade have gone to France. D. Wine production and consumption remains the same as before trade. China is now consuming 9,600 containers of toys and 1,400cases of wine, the same levels of both as prior to trade. Hence all of the benefits of trade have gone to China

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