Suppose that in the United States, producing an aircraft takes 10,000 hours of l

Question

Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor, while producing a shirt takes 4 hours of labor.

What will these nations trade?

a) China will export aircraft, while the United States will export shirts.

b) China will export shirts, while the United States will export aircraft.

c) Both nations will export shirts.

d) There are no gains from trade in this situation.

Explanation / Answer

Yes, these nations will trade. Here, China has a less absolute disadvantage i.e. a comparative advantage in the production of shirts. China will concentrate on producing shirts and the US will exports Aircraft.

The answer is "B", China will exports shirts, while the United States will export aircraft.

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