Answer to Question #323189 in Macroeconomics for Isay

Question

Suppose that in a year an American worker can produce 80 shirts or 30 computers and a Chinese worker can produce 120 shirts or 20 computers. a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs. b. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade? Explain. c. Explain at what price of computers (in terms of shirts) the two countries might trade. d. Suppose that China catches up with American productivity so that a Chinese worker can produce 120 shirts or 30 computers. What pattern of trade would you predict now? How does this advance in Chinese productivity affect the economic wellbeing of the two countries citizens?

Answer 1

Solution:

Part (a):

As can be seen in the graph, if China spends half the time producing computers and a half producing shirts, it will be at point (C). Similarly, if the U.S. spends half the time producing shirts and the other half producing computers, it will be at point (U).

Part (b):

If these countries were to open trade, China would be producing shirts while the U.S. would produce computers. China has the lowest opportunity cost in shirt production, while America has the lowest opportunity cost in computer production. Therefore, China will be at point (C1) where it will produce more shirts than computers, while the U.S. will be at point (U1) where it will produce more computers than shirts.

Part (c):

$Opportunity\;cost=\frac{Commodity\;Rejected}{Commodity\;chosen}$

$U.S. \;shirts=\frac{20}{100}$

$China \;shirt=\frac{10}{100}$

As can be seen from the above opportunity cost table, the price of a computer for China will be 10 shirts while for the U.S., it will be 5 shirts.

Part (d):

If China raises its productivity equal to that of the U.S., then the country will be experiencing intra industry competition as there will be no comparative advantage. This advancement will flood the market with shirts as both countries can produce more of them. This will reduce computer production, leaving a vacuum for computers in the world economy.