Question

1. The following table looks at the maximum amount of Televisions and Machines that China and Japan can produce. Assume that the trade-off between Televisions and Machine production in China and Japan is always the same.

	Maximum Machine Production	Maximum Television Production
China	10 million machines	60 million televisions
Japan	5 million machines	15 million televisions

1. Draw a production possibilities curve for China and Japan. (Assume that China and Japan produce nothing else except machines and televisions.
2. What is the opportunity cost of producing one more machine in China? In Japan?
3. Identify which country has the comparative advantage in machine production and which country has the comparative advantage in television production.
4. Show how China would benefit from trading with Japan.
5. Show how Japan would benefit from trading with China.

Answer 1

1) a) The production possibility curves will be

b) The opportunity cost of producing one machine in Japan = 15/3= 5 televisions.

The opportunity cost of producing machine in China = 60/10 = 6 televisions.

c) As the opportunity cost of producing machines is less for Japan, Japan has a comparative advantage in the production of machines and China will have a comparative advantage in the production of televisions.

d) As Japan could make machines more efficiently, it will be able make more machines if it specializes in the production of machines. China on the other hand, can specialize in the production of televisions and can trade with Japan by exporting televisions and importing machines. By doing so, China will be able to consume more goods than it used to consume without trading.

e) As China could make televisions  more efficiently, it will be able make more televisions  if it specializes in the production of televisions. Japan on the other hand, can specialize in the production of machines and can trade with China by exporting machines and importing televisions. By doing so, Japan will be able to consume more goods than it used to consume without trading.

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