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 Production Possibilities
Product	A	B	C	D	E	F
Apparel	50,000	40,000	30,000	20,000	10,000	0
Chemicals(tons)	0	20	40	60	80	100

U.S. Production Possibilities
Product	R	S	T	U	V	W
Apparel	150,000	120,000	90,000	60,0000	30,000	0
Chemicals(tons)	0	30	60	90	120	150

Instructions: Enter your answers as whole numbers.

a. Are comparative-cost conditions such that the two countries should specialize?

      (Click to select)  Yes  No

     If so, what product should each produce?  

     China should produce  (Click to select)  chemicals  apparel  .

     The United States should produce  (Click to select)  apparel  chemicals  .

b. What is the total gain in apparel and chemical output that would result from such specialization?

    Apparel:

    

    Chemicals:

    

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 1,000 units of apparel for 1½ tons of chemicals and that 20,000 units of apparel are exchanged for 30 tons of chemicals. What are the gains from specialization and trade for each nation?

      (Click to select)  The United States  China  has a ??? gain of  units of apparel.

      (Click to select)  China  The United States  has a ??? gain of  tons of chemicals.

Answer 1

a. Are comparative-cost conditions such that the two countries should specialize?

    Yes

     If so, what product should each produce?  

     China should produce: chemicals.

     The United States should produce: apparel.

b. What is the total gain in apparel and chemical output that would result from such specialization?

    Apparel: 10,000

Chemicals: 10

    

c. What are the limits of the terms of trade?

333 units of apparel for 1 ton of chemicals and 8000(4000*2=8000) units of apparel for 2 tons of chemicals.

Suppose that the actual terms of trade are 1,000 units of apparel for 1½ tons of chemicals and that 20,000 units of apparel are exchanged for 30 tons of chemicals. What are the gains from specialization and trade for each nation?

      The United States has a gain of 10,000 units of apparel.

China has a gain of 10 tons of chemicals.