Question

Opportunity Cost Agriculture Industrial Units produced by one worker in one year: Workforce (people) Agriculture China 1000 10 USAL 300 20 Industrial 1 0 100 China USA The Outcome without Trade The Outcome with Trade The Gains from Trade What They Produce and Consume (units) The Increase in consumption What They Produce (units) What They consume (units) What What They Trade funits) Agriculture China Agriculture: ndustrial periculture dustriak Industrial Agriculture industrial Agriculture: Trade 3000 Agricultural for 14000 industrial industrial Agriculture Industrial Agriculture, ndustrial Agriculture Industrial

Answer 1

Before we start with the calculations the following assumption is made -

• Workforce in US and China is divided evenly between agriculture and industrial goods.

The following table is used to calculate subsequent tables -

Country	US	China
Workforce	150 each	500 each
Agriculture (total units per year)	3000	5000
Industry   (total units per year)	15000	5000

The opportunity cost is calculated as below -

	Opportunity cost
Country	Agriculture	Industry
US	5	0.2
China	1	1

If both the countries specialize in producing that good in which they have relatively low opportunity cost then the outcomes for with trade are -

	Outcomes without Trade		Outcomes with trade					Gains from trade
Country	What is produced and consumed (units)		What is produced		What is traded	What is consumed		Increase in consumption (Comparing with and without trade consumption)
	Agriculture	Industry	Agriculture	Industry	Trade 3000 units of Agriculture with 14000 units of Industry.	Agriculture	Industry	Agriculture	Industry
US	3000	15000	-	30000		6000	16000	+3000	+1000
China	5000	5000	10000	-		7000	14000	+2000	+9000

Answer 1 :

From the opportunity cost table we find that US has a comparative advantage in producing industrial goods as relative opportunity cost is less. i.e it has to give up 0.2 units of agricultural good to produce 1 unit of industrial good whereas China has to give up 1 unit of agricultural good to produce 1 unit of industrial good. Similarly China has a comparative advantage in producing agricultural goods

Answer 2 :

In 3rd table we can find that when each country specializes in producing that good which it can make at lesser cost then the collective wealth increases as both countries are better off with trade.So for China collective wealth in terms of units increases by 11000 and for US it creases by 4000.

Answer 3 :

After trade, China can consume 2000 units more of agricultural good and 9000 units more of industrial good compared to without trade situation, so China is better off with trade.

Answer 4 :

After trade, US can consume 3000 units more of agricultural good and 1000 units more of industrial good compared to without trade situation, so US is better off with trade.

Answer 5 :

If we look at the last column of 3rd table we find that the gains in trade for China is greater than US in terms of units under ceteris paribus assumption. This means actual gains of trade is solely in terms of units and is irrespective of price differentials, wage differentials and exchange rate differentials between the two countries.

Since China gains more than US with trade arrangement, therefore gains of trade is not divided equally between countries.