Question

The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative D and for the United States is alternative S. Product China Production Possibilities A B DEF 80,000 64,000 48,000 32,000 16,000 0 32 64 96 128 160 Chemicals(tons) Product Apparel Chemicals(tons) U.S. Production Possibilities R S T U 240,000 192,000 144,000 96,0000 0 48 96 144 V 48,000 192 W 0 240 Instructions: Enter your answers as whole numbers. a. Are comparative-cost conditions such that the two countries should specialize? Yes If so, what product should each produce? China should produce chemicals 1. The United States should produce apparel b. What is the total gain in apparel and chemical output that would result from such specialization? Apparel: C units

Answer 1

(a) Yes

Opportunity cost (OC) as follows.

In China,

OC of apparel = 160/80,000 = 0.002 chemical

OC of chemical = 80,000/160 = 500 apparel

In US,

OC of apparel = 240/240,000 = 0.001 chemical

OC of chemical = 240,000/240 = 1,000 apparel

Since China can produce chemical at lower OC than US can, China should produce Chemical.

Since US can produce apparel at lower OC than China can, US should produce Apparel.

(b)

Before trade,

Total apparel = 32,000 + 192,000 = 224,000

Total chemical = 96 + 48 = 144

After trade, US produces 240,000 apparel and China produces 160 chemical.

Gain in apparel = 240,000 - 224,000 = 16,000

Gain in chemical = 160 - 144 = 16

(c)

Limit for TOT is 1,000 apparel for 1 chemical and 2,000 (= 2 x 1,000) apparel for 2 chemical.

When US exports 32,000 apparel and imports 48 chemical, US consumes (240,000 - 32,000) = 208,000 apparel and 48 chemical.

When China imports 32,000 apparel and exports 48 chemical, China consumes 32,000 apparel and (160 - 48) = 112 chemical.

United States has gain of (208,000 - 192,000) = 16,000 apparel.

China has gain of (112 - 64) = 48 chemical.