Each Chinese worker can produce either 2 airplanes or 8 toys in one week. Each A

Question

Each Chinese worker can produce either 2 airplanes or 8 toys in one week. Each American worker can produce either 5 airplanes or 10 toys in one week. On the graphs below, draw in the weekly production possibilities curves for China and the U.S. for the production of airplanes and toys. Please label the X- and Y-intercepts on both graphs. China U.S Airplanes Airplanes Toys Toys 1. PRIOR TO TRADE: The United States decides to produce and consume 4,000 airplanes and 2,000 toys. China decides to produce and consume 750 airplanes and 5,000 toys. Please identify these combinations on both graphs as Point I. hat is the opportunity cost of producing one airplane in terms of toys in China? In the U.S.? For what good(s) does China have the absolute advantage in production? For what goods(s) does China have the comparative advantage in production? 3. 4. WITH TRADE: The U.S. and China decide to trade in a ratio of 1 airplane for 3 toys. Complete the following to determine each country's gain from trade. a. The U.S. keeps 4,000 airplanes and trades b. China keeps 5,000 toys and trades toys to U c. With specialization and trade, the U.S. now has airplanes to China for toys airplanes. airplanes and airplanes and_toys. Label this toys. Label this combination Point N on the U.S. graph. China now has combination Point N on China's graph. d. The U.S.'s gain from trade is China's gain from trade is

Explanation / Answer

a. US produces and consumes 4000 airplanes which require 4000/5 = 800 labors and 2000 toys which require 2000/10 = 200 labors before trade. Hence it has total of 800+200 = 1000 labors.

As US has specialization in producing airplanes it will employ all its resources to produce airplanes and will manufacture 1000* 5 = 5000 airplanes.

and if it keeps 4000 airplanes then will trade 1000 airplanes to china for 1000*3 = 3000 toys.

b. China will use all labor to produce toys only and hence will produce toys only. It will employ all 1000 labors to produce toys hence will manufature 1000*8 = 8000 toys.

thus it keeps 5000 toys and trades 8000-5000=3000 toys to US for 1000 airplanes.

c. The US now has 4000 airplanes and 3000 toys. China now has 1000 airplanes and 5000 toys.

d. The US gain from trade = 1000 toys ( as earlier it has 4000 planes and 2000 toys)

CHina's gain from trade = 1000-750 = 250 airplanes (as it has 750 planes earlier).

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