Use the production possibilities for US and China given below. US Production Pos
ID: 1226102 • Letter: U
Question
Use the production possibilities for US and China given below.
US Production Possibilities
Product
A
B
C
D
E
F
Apparel (1000 units)
10
8
6
4
2
0
Chemicals (tons)
0
4
8
12
16
20
China Production Possibilities
Product
R
S
T
U
V
W
Apparel (1000 units)
30
24
18
12
6
0
Chemicals (tons)
0
6
12
18
24
30
Before specialization and trade occur, the optimal product mix for US is combination D and for China is combination S.
a. Compared to the initial optimal product combinations D and S, world output of chemicals is ________________ (smaller, greater) by _____ tons of chemicals and world output of apparel is ________________ (smaller, greater) by _____ 1000 units of apparel.
b. The actual terms of trade between apparel and chemicals turns out to be
1 A = 1 ½ C
Draw the trading possibilities lines for US and China on the graphs of their PPCs from these graphs.
c. Based on the actual terms of trade in previous part of this question, US can now choose four 1000 units of apparel and ______ tons of chemicals and China can now choose six tons of chemicals and ______ 1000 units of apparel. Specialization and trade between the two nations has ______________ (decreased, increased) the standard of living in US and has ______________ (decreased, increased) the standard of living in China.
US Production Possibilities
Product
A
B
C
D
E
F
Apparel (1000 units)
10
8
6
4
2
0
Chemicals (tons)
0
4
8
12
16
20
China Production Possibilities
Product
R
S
T
U
V
W
Apparel (1000 units)
30
24
18
12
6
0
Chemicals (tons)
0
6
12
18
24
30
Explanation / Answer
a. Compared to the initial optimal product combinations D and S, world output of chemicals is greater by 32 (50 - 18) tons of chemicals and world output of apparel is greater by 12 (40 - 28)1000 units of apparel.
World can produce 50 units of chemicals i.e. 30 units by China and 20 units by the US. At combination of D and S, these two countries are producing only 18 units of chemicals i.e. 12 units by the US and 6 units by China. So, world production is greater than the production done by these two countries.
Similary, world can produce 40 units of apparel i.e 30 units by China and 10 units by the US. At combination of D and S, these countries are producing only 28 units of apparel i.e. 4 units by the US and 24 units by the China. So, world production of apparel is greater than the production done by these countries.
b. Opportunity cost of producing chemicals in the US:
20 units of chemicals = 10 units of apparel
1 unit of chemical = 1/2 unit of apparel
Opportunity cost of producing apparel in the US:
1 unit of apparel = 20/10 unit of chemical
1 unit of apparel = 2 unit of chemical
Opportunity cost of producing chemicals in China:
30 units of chemicals = 30 units of apparel
1 unit of chemical = 1 unit of apparel
Opportunity cost of producing apparel in China:
30 unit of apparel = 30/30 unit of chemical
1 unit of apparel = 1 unit of chemical
Opportunity cost of producing chemical is less in the US so it has comparative advantage in the production of chemicals and China has a comparative advantage in the production of apparel.
Therefore, the US will export chemicals and China will export apparel.
c. US can now choose four 1000 units of apparel and 6 tons of chemicals and China can now choose six tons of chemicals and 24 1000 units of apparel. Specialization and trade between the two nations has increased the standard of living in US and has increased the standard of living in China.
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