Comparative Advantage and Trade Exercise



Comparative Advantage and Trade Exercise

Apparel Apparel

100

90

50

30

20 30 Equipment 50 100 Equipment

China U.S.

Using equal amounts of resources, the U.S. and China can produce as shown on the production possibilities graphs above. Use the information on the graphs above to answer the following questions.

The U.S. has an absolute advantage in _____________________.

Portugal has an absolute advantage in _____________________.

The opportunity cost of 1 unit of equipment in the U.S. is ________________________.

The opportunity cost of 1 unit of apparel in the U.S. is _________________________.

The opportunity cost of 1 unit of equipment in China U.S. is _________________________.

The opportunity cost of 1 unit of apparel in China is ________________________.

The U.S. has a comparative advantage in _____________________.

Portugal has a comparative advantage in ___________________.

Fill in the table below. Assume that without trade, each country produces both goods at on the point indicated on their PPC and assume that with trade, each country exports ½ of its production.

Without Trade With Trade With Trade

(production) (consumption)

Apparel Equipment Apparel Equipment Apparel Equipment

China

The U.S.

Total

What happens to total world production when the countries specialize and trade? What economic concept describes this result?

Are the countries better off as a result of trading? What determined whether trade made the countries better off?

Find the terms of trade need to be for these countries to be willing to trade:

The U.S. would have to receive more than _____ units of apparel for a unit of equipment

and China is willing to pay less than ____ units of apparel for a unit of equipment, so

they can agree on a price for equipment between ____ and ____ units of apparel for a

unit of equipment.

China would have to receive more than______ units of equipment for a unit of apparel and the U.S. is

willing to pay less than _____ units of equipment for a unit of apparel so they can agree on a price

between ____ and ____ units of equipment for a unit of apparel.

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