Suppose that in a year an American worker can produce 100...

Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers. a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs. b. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade? Explain. c. Explain at what price of computers (in terms of shirts) the two countries might trade. d. Suppose that China catches up with American productivity so that a Chinese worker can produce 100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance in Chinese productivity affect the economic wellbeing of the two countries' citizens?

Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers.
a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs.
b. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade? Explain.
c. Explain at what price of computers (in terms of shirts) the two countries might trade.
d. Suppose that China catches up with American productivity so that a Chinese worker can produce
100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance
in Chinese productivity affect the economic wellbeing of the two countries' citizens?

Key Concepts

Production Possibilities Frontier

The production possibilities frontier (PPF) is a curve that shows all the maximum output combinations of two goods that can be produced given available resources and technology. It illustrates the trade-offs and opportunity costs in resource allocation, demonstrating the sacrifice of producing one good to produce more of another.

Opportunity Cost

Opportunity cost is the measure of the trade-off in production, defined as the amount of one good that must be forgone to produce an additional unit of another good. It is a central concept in understanding production decisions and the shape of the PPF, as it highlights the relative efficiency of producing different goods.

Comparative Advantage

Comparative advantage is the principle that a country or agent should specialize in producing and exporting goods for which it has a lower opportunity cost relative to other goods and import goods for which it has a higher opportunity cost. This concept underpins the rationale for international trade, making it beneficial even if one country is absolutely better at producing all goods.

Gains from Trade

Gains from trade refer to the benefits that countries or agents obtain by specializing in the production of goods for which they have a comparative advantage and then trading for others. This allows all parties involved to enjoy a higher total consumption of goods than they could produce on their own, leading to an overall increase in economic efficiency and welfare.

Terms of Trade

The terms of trade define the exchange ratio between two goods in international trade. They determine how much of one good is traded for another and need to fall between the opportunity costs of production for both trading partners, ensuring that each gains from participating in trade.

Productivity Changes and Their Impact on Trade Patterns

Changes in productivity, such as a country improving its production capabilities, can shift the PPF and affect the opportunity cost ratios. This in turn may alter the comparative advantage, leading to a shift in trade patterns. When a country's productivity improves, it generally benefits through increased production and consumption possibilities, thereby enhancing its citizens' economic wellbeing.

Transcript

00:01 Okay, question 8 is saying that american and chinese workers, they both produce t -shirts or computers.

00:10 So, american worker can either produce 100 shirts or 20 computers, and chinese people, a chinese worker can either produce 100 shirts for 10 computers.

00:22 So to draw the production possibility frontier, we labeled, x x x as a shirt and then y axis as computers so for america i use um red uh sorry i use uh blue for america so if they devote all the workers to make sure they will reduce 100 shirts and then 20 computers on the y axis so the so the ratio is not very correct but but it's okay.

01:07 So this is the production frontier for american.

01:13 So for chinese people, it's 110.

01:17 So 100 units of shirts, so same data as american.

01:21 But they can only produce 10 computers if they devote it all workers to producing computers.

01:31 All right.

01:32 So suppose without trump.

01:36 The workers in each country spend half their time producing each good.

01:41 So if they spend half the time producing each good, they will end up having the middle point, consume the middle point of the frontier.

01:54 So that will be 50 shirts for americans and 10 cars for americans, while also 50 shirts for chinese and 5 cars for chinese.

02:06 Okay, so if they're open to trade, which country would export shirt? so we can just calculate their opportunity cost for producing, say, computers.

02:23 So the opportunity costs for americans to produce one unit of computer is, so, 20 divided by 20 is 1, so 100 divided by 20 will be 5.

02:38 So the opportunity cost for producing one unit of computer for americans is five units of a, what is a shirt, yeah.

02:49 And for chinese, it is one to ten.

02:56 So the opportunity cost is lower for the american to produce computers.

03:02 Right.

03:03 So at the end, we should, so we should let americans produce computers while chinese produce shirts.

03:11 So they will trade.

03:15 So china will export shirts to the united states and the united states will export cars.

03:24 So there's three between them...

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