Question90 Consider the following production data for Germany and Spain:[table]
| Germany | Spain Labour force | 50 | 180 Bottles of cider per worker | 80 | 25 Loaves of bread per worker | 8 | 2
[/table] Assume that each country spends half of their income in each good. Please consider cider to be the numeraire good.Choose the best alternative based on the information from the previous Table Under Free Trade, the increase in wage in Spain (with respect to Autarky) is -5 bottles Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 5 bottles Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 0 bottles Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 15 bottles Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 20 bottles ResetMaximum marks: 2 Flag question undefined

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BlackTom AI · Accepted Answer

We start by restating the given problem to ensure clarity: we have production data for Germany and Spain, with labor force and output per worker for two goods (bottles of cider and loaves of bread), and we assume each country spends half of its income on each good, treating cider as the numeraire good. We are asked to choose the best alternative for the change in Spain’s wage under Free Trade relative to Autarky, based on the table.
Option 1: Under Free Trade, the increase in wage in Spain (with respect to Autarky) is -5 bottles.
- This option suggests a decrease in Spain’s wage measured in bottles of cider. To assess plausibility, consider that free trade tends to reallocate production toward comparative advantage; if Spain’s productivity per worker in a good changes the relative value of wages, a negative wage change would imply Spain pivots away from the sectors where it has an advantage. Given the data indicate Spain’s output per worker and the assumed half-income expenditure, a negative wage change would require Spain to be relatively worse off in the numeraire terms, which conflicts with typical free-trade adjustments unless there is some bias in the data. Without evidence of a systematic decline in productivity or terms of trade shock that would reduce wages, this option appears economically unlikely.
Option 2: Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 5 bottles.
- This option posits a positive wage change of 5 bottles. Under free trade, if Spain has an advantage in producing one good (relative productivity) and trades for the other, wages measured in the numeraire could rise by a constrained amount reflecting the reallocation of resources and the new relative prices. Since cider is the numeraire, a positive change of 5 bottles could reflect an improved real wage when measured against cider, consistent with reallocation toward the good where Spain has a comparative advantage and improved terms of trade, assuming the numeric data support such a shift.
Option 3: Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 0 bottles.
- A zero wage change would imply that free trade leaves Spain’s real wage in terms of the numeraire unchanged. This could occur if terms of trade and opportunity costs exactly balance, yielding no net gain in wage terms. However, given typical analyses of free trade with differences in productivity, a neutral outcome is less likely unless the data imply symmetric productivity or balanced trade effects that cancel out.
Option 4: Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 15 bottles.
- A 15-bottle increase indicates a substantial improvement in Spain’s real wage when measured in cider units. This would require a large positive reallocation benefit and/or strong favorable terms of trade under free trade. While possible in principle, such a large shift would need corresponding productivity and price changes that exceed the adjustments suggested by the provided data, making this option more ambitious than the others.
Option 5: Under Free Trade, the increase in wage in Spain (with respect to Autarky) is 20 bottles.
- An increase of 20 bottles signals an even more pronounced gain in real wage under free trade. This would likely demand very favorable comparative advantages and terms of trade shifts. Given standard intuition and the limited data presented, this seems less parsimonious than smaller gains, unless the data imply a dramatic advantage in one good that dominates, which is not explicitly evident from the information given.

In summary, each option translates a potential wage outcome under free trade into a bottled (cider-denominated) wage change. The logic hinges on how free-trade reallocation interacts with relative productivity and prices when cider is the numeraire. The option proposing a modest positive gain aligns with common free-trade outcomes where specialization yields measurable but not extreme gains; the larger gains require stronger support from the data. The negative or zero-wage-change options are less consistent with typical, straightforward free-trade adjustments unless there is a specific balancing mechanism in the data. Therefore, the option that presents a modest positive increase is the one that best matches standard comparative-advantage reasoning given the described setup.

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