Question

Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers. There are 1 million workers in each country.
Required:
a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs.
b. Who has the comparative advantage in the production of shirts? What about for computers?
c. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade?
d. Explain at what price of computers (in terms of shirts) the two countries might trade.

Answer 1

Answer:

a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs.

• attached graph

b. Who has the comparative advantage in the production of shirts? What about for computers?

• China has the comparative advantage in the production of shirts, while the US has the comparative advantage in the production of computers.

c. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade?

• China would export 50 million shirts in exchange for 5 million computers (or more if they can). Trade would benefit the US since it will only need to trade 5 million computers in exchange for 50 million shirts, and it will still have 15 million computers that it can consume or trade with come other country.

d. Explain at what price of computers (in terms of shirts) the two countries might trade.

• the minimum and maximum prices would be 5 to 10 shirts per computer. If the price of shirts per computer is 10 or near 10, then the US wins more. If the price of shirts per computer is 5 or near 5, then China wins more.

Explanation:

opportunity cost of producing 1 shirt in the US = 20/100 = 0.2 computers

opportunity cost of producing 1 computer in the US = 100/20 = 5 shirts

opportunity cost of producing 1 shirt in China = 10/100 = 0.1 computers

opportunity cost of producing 1 computer in China = 100/10 = 10 shirts

without trade:

• total production of shirts in the US = 50 million
• total production of computer in the US = 10 million

• total production of shirts in China = 50 million
• total production of computer in China = 5 million

with trade:

• total production of computers in the US = 20 million
• total production of shirts in China = 100 million