Question

Suppose that in a year an American worker can produce 60 shirts or 30 computers and a Chinese worker can produce 60 shirts or 12 computers. There are 1 million workers in each country.

Use the blue line (circle symbol) to graph the production possibilities frontier (PPF) for the United States, and use the green line (triangle symbol) to graph the production possibilities frontier for China.

Suppose that without trade the workers in each country spend half their time producing each good.

Use the black point (plus symbol) to indicate this production and consumption point for the United States, and use the grey point (star symbol) to indicate this production and consumption point for China.

If these countries were open to trade, would export shirts and would benefit from trade.

The price of a computer can be expressed in terms of shirts. The highest price for which a computer can be traded that would make both countries better off is shirts per computer, and the lowest price that makes both countries better off is shirts per computer.

Suppose that China catches up with American productivity so that a Chinese worker can produce 60 shirts or 30 computers.

True or False: There are no longer gains from trade.

True

False

Answer 1

If the countries were open to trade, china would expert shirts and both china and US would benefit from trade for America, the opportunity cost of 1 shirt = 30/60 = 1/2 computes. For china, the opportunity cost of 1 shirt = 12/60 = 1/5 so china has lower opportunity cost of producing shirts so it has comparative advantage and will expert shirts The Lightest price for which a computer can be traded that would that would make both countries better off in 5 shirts per computes and the lowest price in 3 shirts per computers. \r\n True, there are no longer gains from trade. Once the productivity is the same in the two countries, the benefits of trade disappear. Trade is beneficial because it allows countries to explicit their comparative advantage. If china and America have exactly the same opportunity cost of producing shirts and computers there will be no more gains from trade available.