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	40,000	32,000	24,000	16,000	8,000	0
Chemicals(tons)	0	16	32	48	64	80

U.S. Production Possibilities
Product	R	S	T	U	V	W
Apparel	120,000	96,000	72,000	48,0000	24,000	0
Chemicals(tons)	0	24	48	72	96	120

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)  apparel  chemicals  .

     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:

    

Answer 1

1)

Let us take the case of China

Opportunity cost of 1 unit of apparel =80/40000=0.002 tons of chemical

Opportunity cost of 1 ton of chemicals=40000/80=500 units of apparel

Let us take the case of US

Opportunity cost of 1 unit of apparel =120/120000=0.001 tons of chemical

Opportunity cost of 1 ton of chemicals=120000/120=1000 units of apparel

We can see that opportunity cost of 1 unit of apparel is lower in US. So, we can say that US has comparative advantage in apparel production. US should specialize in apparel production.

We can see that opportunity cost of 1 unit of chemical is lower in China. So, we can say that China has comparative advantage in chemical production. China should specialize in chemical production.

We can see that comparative cost conditions favor specialization.

b)

Initially, optimal product mix for China is alternative D and for the United States is alternative S.So

Current apparel production=16000+96000=112000 units

Current chemical production=48+24=72 tons

After specialization

Apparel production=120000 units (US can make a maximum of 120000 units)

Chemical production=80 tons (China can make a maximum of 80 tons)

So, Gain in output after specialization

Apparel =120000-112000=8000 units

Chemical=80-72=8 tons