The following hypothetical production possibilities tables are for China and the
ID: 1225177 • Letter: T
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.
Instructions: Enter your answers as whole numbers.
a. Are comparative-cost conditions such that the two countries should specialize?
(Click to select)YesNo.
If so, what product should each produce?
China should produce (Click to select)chemicalsapparel.
The United States should produce (Click to select)chemicalsapparel.
b. What is the total gain in apparel and chemical output that would result from such specialization?
Apparel: units.
Chemicals: tons.
c. What are the limits of the terms of trade?
units of apparel for 1 ton of chemicals and units of apparel for 2 tons of chemicals.
Suppose that the actual terms of trade are 1 unit of apparel for 1½ units of chemicals and that 20,000 units of apparel are exchanged for 30 units of chemicals. What are the gains from specialization and trade for each nation?
(Click to select)The United StatesChina has a gain of units of apparel.
(Click to select)ChinaThe United States has a gain of tons of chemicals.
China Production Possibilities Product A B C D E F Apparel 50,000 40,000 30,000 20,000 10,000 0 Chemicals (in tons) 0 20 40 60 80 100Explanation / Answer
In modern society, due to complexity in demand, no coutry is self sufficient in manufacturing all products required for the country. So they have to depends upon others for exchange of commodities. The exchange should provide benefits to all countries. This interational trade will depend upon the law of comparative cost. It states that a country will specialize in the production of a commodity in which it has comparative advantage.
In this problem two countries are USA and China. Two products are Apparels (A) and chemicals (C). As per production possibility data, in China for producing 20 tons of chemicals, 10,000 apparel production is sacrificed. So for each ton of C, 10,000/20=500 A production opportunity is lost. Thus cost of producing 1 ton chemical in C is 500 A.
In USA 30 tons chemicals are produced by reducing 30,000 units of apparel. So for production of one ton chemical, opportunity of producing 1,000 apparels is lost. Thus opportunity cost of chemicals per ton is 1,000 apparel.
By comparing the two figures, it can be said that opportunity cost of chemicals is less in China. Similarly, looking from other side, USA has less opportunity cost in production of apparel.
So China will specialize in chemicals and use all resources in its production. In this manner, it can produce maximum 100 tons of chemicals. USA will specialize in apprels and by using all its resources, will maufacture 150,000 apparels.
At present China is producing quatities of combination point D. So it will produce 20,000 apparels and 60 tons chemicals. USA is now following the combination of point S where 120,000 apparels and 30 chemicals are produced. So total production of apparels now in two coutries is 20,000+120,000=140,000. If USA specialize in apparel, then total production will be 150,000. It is 150,000-140,000=10,000 extra. It is the advantage of specialization.
Next consider chemicals. At present total chemical production is 60+30=90 tons. If China specialize in chemicals production, then output is 100 tons. So increase in production is 100-90=10 tons.
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From above discussions, following resilts can be drawn:
A. Yes, As per comparative cost codition, two countries will specialize.
China to produce Chemicals and USA will manufacture Apparels.
B. Total gains from specialization is 1,000 apparels and 10 tons of chemicals.
C. Tems of trade is the exchange rate of two products between two countries. In other words it will indicate how gains from specialization will be shared by two countries. In this problem, if free systems operate, then 10 tons chemicals will be exchanged for 1,000 apparels. So one ton chemical will be exchanged for 1,000 apparels. But in practice, one country may be powerful interationally and dictate other. then terms of trade will not be freely determined. It will put limit on the operation. It will tilt towards dominating country. It is known as limit on terms of trade.
Here 1 ton chemicals will be exchaged for 1,000 apparels. Similarly, 2 tons chemicals will be exchaged for 2,000 apparels.
Here actual terms of trade is 1000 units of apparels for 1.5 units of chemicals. so 20,000 units of chemicals should be exchanged for 25 units of chemicals. But actual exchange is 20,000 apparels for 50 uits of chemicals. So China has to pay extra 5 tons chemicals to USA.
Answer: Thus US is gaining 5 tons of chemicals.
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