Question

The following is a free response question to be used as practice for future exams. You can complete the assignment in this document, using the drawing tools in Word (or any photo editing program) or print this document, and complete the activity by hand, submitting a scan or photo of your work. When you are done, submit the assignment for grading by your instructor. This question will be graded out of 6 points.

1. The table below shows the production possibilities curves for two countries: China and the United States. Using equal amounts of resources, China can produce 200 computers or 400 cars, whereas the United States can produce 200 computers or 1,200 cars.

	CARS	COMPUTERS
United States	1200	200
China	400	200

(a) Calculate the opportunity cost of a computer in China.

(b) If the two countries specialize and trade, which country will import computers? Explain.

(c) If the terms of trade are 4 cars for 1 computer, would trade be advantageous for each of the following?

(i) United States

(ii) China

(d) If productivity in China doubles, which country has the comparative advantage in the production of cars?

Answer 1

Level of production in both the countries

USA: 1200 cars or 200 computers

China 400 cars or 200 computers

a. Opportunity cost in both the countries

	Opportunity cost for car	Opportunity cost for computer
USA	1/6 computer	6 car
China	½ computer	2 car

Opportunity cost for the production of computers in China is 2 cars

b. USA has an absolute advantage in production of cars but neither of the countries have an absolute advantage in production of computers.

But as can be seen from the above table, the opportunity cost in China for production of computers is lower than the opportunity cost so China has a comparative advantage in the production of computers.

So if trade takes place USA will produce cars and import computers from China. China will produce computers and import cars.

c. If the terms of trade are 4 cars for 1 computer, would trade be advantageous for each of the following?

Level of production in the two countries if trade takes place

	Cars	Computers
USA	1200	-
China	-	200

Terms of trade= 4 cars for 1 computer

USA will get 1200 cars or 300 computers

China will get 800 cars or 200 computers

d. Trade will be advantageous for both the countries as both the countries will get more goods after traded. If productivity in China doubles, which country has the comparative advantage in the production of cars?

Level of production in both the countries

USA: 1200 cars or 200 computers

China: 800 cars or 400 computers

Opportunity cost in both the countries

	Opportunity cost for car	Opportunity cost for computer
USA	1/6 computer	6 car
China	½ computer	2 car

As the opportunity cost for car is lower in USA, USA will have a comparative advantage in production of cars.