Question

4) If the US has 250,000 hours available to produce 2 goods: Wheat which takes 2 hours per ton of wheat to produce and Airplanes which takes 1,000 hours per airplane to produce. If China has 500,000 hours available to produce 2 goods: Wheat which take 5 hours per ton of wheat to produce and airplanes which takes 3,000 hours per airplane to produce. a. Draw the PPF diagram for the US assume they consume half of each product without trade. Demonstrate all relevant points. b. Draw the PPF diagram for China assume they consume half of each product without trade. Demonstrate all relevant points c. Is there a basis for trade between US and China? If so what is the economic theory for the basis of trade? d. If they trade and the terms of trade are 50,000 Wheat for 100 planes, demonstrate and prove the gains from trade.

Answer 1

ans a.. E is the point where US consume. And A is the point if it produce only plane and B is point if it produce only wheat.

Ans-b F is point where china consume. C and D are the points where if it produce only plane and only wheat respectively.

ans-c Ricardian theory is basis of their trade.

Ans-d if they trade and terms of trade is 50000 wheat for 100 planes then China's PPF will shift upward as shown in diagram. Now it can consume more planes than before at F' point. US PPF will remain same as before because after trade also it will consume same as before at E point.