Output Per Year of Labor Steel 100 90 Food 150 60 US China a) Explain which coun

Question

Output Per Year of Labor Steel 100 90 Food 150 60 US China a) Explain which country has an absolute advantage in the production of each good. (6 points) b) Explain which country has a comparative advantage in the production of each good. (6 points) c) Suppose that the US and China currently do not trade with each other. Each has 1,000 years of labor to use producing steel and food. Show that US and China can both gain from trade (10 points) by completing the following table Without Trade With Trade Gains from Trade Production Consumption Production Consumption 20,000 Steel 18,000 Food 123,000 China Steel 63,000 Food 18,000 US 130,000 70,000 20,000

Explanation / Answer

(a) US has the absolute advantage in the production of steel and food both beacuse US can produce more output of steel and food with given units of labor.

(b)US has the comaparative advantage in producing food because it has the lower opportunity cost in producing food. And China has comparative advantage in producing steel because it has the lower opportunity cost in producing steel.

(c)   

Without trade US and China consume whatever amount they produce. Because there is no trade so they can't get output from another country by giving some production of their country.

With trade: US has the comparative advantage in producing food because it can produce (150*1000) =150,000 output of food and with no production of steel. And China has the comparative advantage in producing steel so it can produce (90*1000) = 90000 output of steel and with no production of food.

As a whole when there will be trade between US and China then there will be gains from trade because now both countries can consume higher level of both the goods. For example: earlier without trade US can consume only 18,000 units of steel , but after trade it can consume 20,000 units of steel.(so there is an increase in consumption of steel by 2,000 units).

And similarly China can consume only 63,000 units of steel , but after trade it can consume 70,000 units of steel (so there is an increase in consumption of steel by 7,000 units)

Overall US and China can both gains from trade.

Without trade Without trade With trade With trade Trade Gains from trade Production Consumption Production Consumption Increase in consumption US Steel 18,000 18,000 0 20,000 ,Gets 20,000 from China (20,000-18,000)=2000 Food 23,000 23,000 150,000 130,000 Gives 20,000 to China (130,000-23,000)=107,000 China Steel 63,000 63,000 90,000 70,000 Gives 20,000 to US (70,000-63,000)=7,000 Food 18,000 18,000 0 20,000 Gets 20,000 from US (20,000-18,000)=2,000

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