Question

Please draw a diagram and type (easier to read) your answers for all the questions. Also include an explanation. Thanks.

For Thurs, each of you should create a new comparative advantage diagram using these numbers: The U.S. can make 50 cars and China 10. The U.S. can make 10 computers and China 4. Include what their ppc gradiants look like? And what would be a "fair" currency value between the 2 countries when it came to cost of their cars and computers?

Answer 1

PPF is defined as a graph showing the combinations of the two goods produced , with the all the available resources in the economy.

Gradient (slope) of PPF is the opportunity cost of production of one good in terms of the other good.

Let computers on the horizontal axis & cars on vertical, then the slope shows the opportunity cost of production of computers in terms of cars.

So in China

To produce 4 computers, give up 10 cars

Thus to produce one computer = give up 10/4 , 2.5 cars

Similarly for U.S.

For one computer, give up 50/10 = 5 cars

Thus China has lower opportunity cost of production for computers in terms of cars, hence China has comparative advantage ( Specialization) in computer production & so U.S. has C.A. in cars production.

Now graphs of two countries PPF

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Now the fair currency value, when two countries open to trade is when both nations get benefitted from free trade, so the price of computer in terms of cars should lie between the the opportunity cost of two nations

Thus

2.5 cars/ computer < free trade price of computer < 5 cars /comput