Concept: Increasing Consumption 1 Question Help Suppose China and Germany produc

Question

Concept: Increasing Consumption 1 Question Help Suppose China and Germany produce only cell phones and digital music players. Assume that each country uses only labor to produce each good, and that the cell phones and digital music players made in China and Germany are exactly alike. The table below shows how much each country can produce of each good with one hour of labor Output per Hour of Labor l Music Cell Phones China 13 Suppose that China and Germany do not trade with each other. Each has 100 hours of labor with which to produce cell phones and digital music players, and the countries are currently producing amounts of each good shown in the table below: Consumption with 100 Hours of Labor Cell Phones Digital Music Pla 130 1,980 130 Assume now that each country specializes in producing that good in which it has a comparative advantage. Further, assume for simplicity that one cell phone can be traded for one digital music player If China trades 130 cell phones for 130 digital music players with Germany, then, with trade, China will be able to consume the same number of digital music players and 90 additional cell phones (enter a numeric response using an integer), and Germany will be able to consume the same number of cell phones and 104 additional digital music players.

Explanation / Answer

Comparative advantage means that which country has lower opportunity cost i.e., what it has to sacrifice. For eg. here china can produce 22 cell phone (call it x) or 13 music player ( cal it y). This means the opportunity cost of making 22 x is 13y. So opp. cost of making 1 x will be 13/22 of y. Similarly for germany, opp . cost of making 1 x= 9/5 of y. So China has comparative advantage in making x because its opp. cost is lower, 13/22 < 9/5.So China will make x only and germany will make y only, and then they both will trade.

China will produce 2200 x in 100 hours (as it is given that it can make 22 x in 1 hr). Germany will produce 900 y in 100 hrs. Now both will trade.130 x from china will be given to Germany for 130 y.

China

2200 -130= 2070 i.e., 130 x exported to germany so 2070 x left for consumption. It was earlier consuming 1980 x and 130 y. Now it will consume 2070 x and 130 y (imported from germany). So its consumption of x has increased from 1980 to 2070 i.e., by 90 units( 2070- 1980= 90)

Germany

900-130 =770 i.e., 130 y exported to china so 770 y left for consumption. It was earlier consuming 666 y and 130 x. Now it will consume 770 y and 130 x (imported from china). So its consumption of y has increased from 666 to 770 i.e., by 104 units( 770- 666= 104).

So in short both will only make what they specialize in or have comparative advantage in, and will trade. This would benefit both. Their overall consumption would increase.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.