4. (Part A) Suppose the USA and China are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:
Table 1. Production of Apparel or Chemicals in the USA and China.
The Opportunity Costs of producing one product or the other are displayed.
1000âs of Tons of
Apparel Units Chemicals
Nation Produced or Produced
USA 50 or 150
China 30 or 60
Which nation has the comparative advantage in producing Apparel? Which nation has the comparative advantage in producing chemicals? Explain how you arrived at these conclusions.
Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Apparel and which nation should specialize in producing Chemicals, and Why?
Suppose a trade proposal is made to exchange 1 thousand units of apparel for 2.5 tons of chemicals. Would these terms of trade (1 Apparel : 2.5 Chemicals ) be acceptable to, and mutually beneficial for, both the USA and China as trading partners? Why or why not?
What are the âpayoffsâ from open trade? What are some of the limitations associated with open trade?
4. (Part B) Suppose the USA and EU are trading, and currencies must be exchanged as goods/services are imported and exported between the two regions. The $USD is the currency of the USA, and the â¬Euro is the currency of the EU.
a. Are the following statements correct or incorrect? Why or why not?
âIf the USA is exporting its goods to the EU, these exports from the USA to the EU create a demand for â¬Euros in the Currency Exchange Market for â¬Euros.â
âIf the USA is importing goods from the EU, these imports to the USA from the EU create a supply of $USD in the Currency Exchange Market for $USDâs.â
âIf the EU is importing goods from the USA, these imports to the EU from the USA create a demand for $USD in the Currency Exchange Market for $USDâs.â
Throughout your answer to any of these other questions, use graphs as needed (all axes and functions completely labeled) to accompany your written analyses.
4. (Part A) Suppose the USA and China are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:
Table 1. Production of Apparel or Chemicals in the USA and China.
The Opportunity Costs of producing one product or the other are displayed.
1000âs of Tons of
Apparel Units Chemicals
Nation Produced or Produced
USA 50 or 150
China 30 or 60
Which nation has the comparative advantage in producing Apparel? Which nation has the comparative advantage in producing chemicals? Explain how you arrived at these conclusions.
Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Apparel and which nation should specialize in producing Chemicals, and Why?
Suppose a trade proposal is made to exchange 1 thousand units of apparel for 2.5 tons of chemicals. Would these terms of trade (1 Apparel : 2.5 Chemicals ) be acceptable to, and mutually beneficial for, both the USA and China as trading partners? Why or why not?
What are the âpayoffsâ from open trade? What are some of the limitations associated with open trade?
4. (Part B) Suppose the USA and EU are trading, and currencies must be exchanged as goods/services are imported and exported between the two regions. The $USD is the currency of the USA, and the â¬Euro is the currency of the EU.
a. Are the following statements correct or incorrect? Why or why not?
âIf the USA is exporting its goods to the EU, these exports from the USA to the EU create a demand for â¬Euros in the Currency Exchange Market for â¬Euros.â
âIf the USA is importing goods from the EU, these imports to the USA from the EU create a supply of $USD in the Currency Exchange Market for $USDâs.â
âIf the EU is importing goods from the USA, these imports to the EU from the USA create a demand for $USD in the Currency Exchange Market for $USDâs.â
Throughout your answer to any of these other questions, use graphs as needed (all axes and functions completely labeled) to accompany your written analyses.
Related textbook solutions
Related questions
TITLE: BENEFITS OF TRADE Trade among nations has been growing faster than the total world GDP. The growth of U.S. exports and imports relative to the U.S. GDP parallels this global trend. Today, exports constitute more than 10 per cent of total national production. In some countries, trade accounts for a much higher share of total economic activity.
Tasks: Consider the table below for the neighbouring nations of Northland and West Coast. The table lists the maximum feasible hourly rates of the production of pastries if no sandwiches are produced and the maximum feasible hourly rates of the production of sandwiches if no pastries are produced. Assume that the opportunity costs of producing these goods are constant in both nations.
| Product | Northland | West Coast |
|---|---|---|
| Pastries (per hour) | 50,000 | 100,000 |
| Sandwiches (per hour) | 25,000 | 200,000 |
a. Based on the data provided, what is the opportunity cost of producing pastries and sandwiches in Northland?
b. What is the opportunity cost of producing pastries and sandwiches in West Coast?
c. Which nation has a comparative advantage in producing pastries and which nation has a comparative advantage in producing sandwiches?
d. Suppose the two nations choose to specialize in producing the goods for which both have a comparative advantage. Both agree to trade at a rate of exchange of one pastry for one sandwich. At this rate of exchange, what are the maximum numbers of pastries and sandwiches that both could agree to trade?
(Table: Production Possibilities for the U.S. and Great Britain) The table shows production possibilities for the United States and Great Britain, assuming that both countries could choose to devote all resources to producing either good. Which statement is correct with regard to the information in the table? |
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a. The U.S. has a comparative advantage in producing music CDs because it can produce more music CDs than anything else. b. These countries should not engage in trade with one another, because the transportation costs of these goods are too high. c. To determine which country has a comparative advantage in either good, we would need to know the monetary measure of production costs for both countries. d. The U.S. has a comparative advantage in producing athletic shoes because it can do so at a lower opportunity cost. |
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