The following hypothetical production possibilities tables are for China and the
ID: 1228113 • Letter: T
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.
China's Production Possibilities
F
U.S. Production Possibilities
W
a. Are comparative-cost conditions such that the two countries should specialize? .
If so, what product should each produce?
b. What is the total gain in apparel and chemical output that would result from such specialization?
c. What are the limits of the terms of trade?
________ units of apparel for 1 ton of chemicals and ________units of apparel for 2 tons of chemicals.
Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 16,000 units of apparel are exchanged for 24 units of chemicals. What are the gains from specialization and trade for each nation?
.
F
Apparel 40000 32000 24000 16000 8000 0 Chemicals 0 10 32 48 64 80Explanation / Answer
(a) Yes, the two countries should specialize. Because the opportunity cost of apparel is more (1A = 0.00195C) in China than in the United States (1A = 0.001C). Thus, United States should produce apparel and the China should produce chemicals.
(b) If they specialize, the United States can produce 120,000 units of apparels and China can produce 80 units of chemicals. Before specialization China produced alternative D and the United States alternative S for a total of 112,000 units of apparel (16,000 + 96,000) and 72 units of chemicals (48 + 24). The gain is 8,000 units of apparel and 8 units of chemicals.
(c) The limits of the terms of trade are determined by the comparative cost conditions in each country before trade: 1000 units of apparel for 1 ton of chemicals and 1000 units of apparel for 2 tons of chemicals.
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