Question

Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a Chinese worker can produce 100 shirts or 10 computers.

A. Graph the production possibilities curve for the two countries. Suppose without trade the workers in each country spend half their time producing each good. Identify this point in your graph.

B. If these countries were to open to trade, which country would export shirts? Give a specific numerical example and show it on your graph.

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 100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance in Chinese productivity affect the economic well-being of the citizens of two countries?

Answer 1

The production possibilities frontier (PPF) illustrates the maximum a country can produce with its resources. The U.S. would likely export shirts as it has a comparative advantage in producing computers. China's rise in productivity may alter or reduce trade patterns, possibly increasing economic well-being.

Step-by-step explanation:

The question relates to the production possibilities frontier (PPF) and international trade. To graph the PPF for each country, plot the maximum production of shirts on one axis and computers on the other. Without trade, each country would produce a combination of 50 shirts and 10 (U.S.) or 5 (China) computers, marking this point on each PPF.

With trade, the United States would export shirts, as it has a comparative advantage in producing computers—it can produce computers with fewer resources relative to shirts than China can. For example, the U.S. might trade 20 shirts for more than one but less than two computers, since 20 shirts are worth one computer in the U.S. but two in China.

Trade might occur at a price where 1 computer equals x shirts, where x is higher than 5 but less than 10. China's productivity rise to match the U.S. level could lead to a new trade pattern or reduce trade as advantages even out. This productivity advance enhances both countries' potential economic well-being, through increased efficiency and potential for more diverse consumption.