Use the production possibilities for US and China given below. US Production Pos
ID: 1226085 • Letter: U
Question
Use the production possibilities for US and China given below.
US Production Possibilities
Product
A
B
C
D
E
F
Apparel (1000 units)
10
8
6
4
2
0
Chemicals (tons)
0
4
8
12
16
20
China Production Possibilities
Product
R
S
T
U
V
W
Apparel (1000 units)
30
24
18
12
6
0
Chemicals (tons)
0
6
12
18
24
30
a. China has an absolute advantage in __________________________ (apparel, chemicals, both apparel and chemicals, neither apparel nor chemicals). US has an absolute advantage in __________________________ (apparel, chemicals, both apparel and chemicals, neither apparel nor chemicals).
b. China has a comparative advantage in __________________________ (apparel, chemicals, both apparel and chemicals, neither apparel nor chemicals). US has a comparative advantage in __________________________ (apparel, chemicals, both apparel and chemicals, neither apparel nor chemicals).
c. If US and China specialize in their comparative advantages:
US will choose point _____ (A, B, C, D, E or F).
China will choose point _____ (R, S, T, U, V or W).
US Production Possibilities
Product
A
B
C
D
E
F
Apparel (1000 units)
10
8
6
4
2
0
Chemicals (tons)
0
4
8
12
16
20
China Production Possibilities
Product
R
S
T
U
V
W
Apparel (1000 units)
30
24
18
12
6
0
Chemicals (tons)
0
6
12
18
24
30
Explanation / Answer
(a)
China has absolute advantage in both apparel and chemicals (Since it can produce more of both goods: 30,000 > 10,000 and 30 > 20).
US has an absolute advantage in neither apparel nor chemicals.
(b) Let's compute opportunity costs (OC):
In China,
OC of apparel = 30 / 30,000 = 0.0001
OC of chemical = 30,000 / 30 = 1,000
In US,
OC of apparel = 20 / 10,000 = 0.002
OC of chemical = 10,000 / 20 = 500
Since China can make apparel at a lower OC than US, China has comparative advantage in apparel.
US has comparative advantage in chemical.
(c) A country will produce only that good in which it has comparative advantage. So,
US will choose point F.
China will choose point R.