Suppose that in a year an American worker can produce 100 shirts or 20 computers, while a Chinese worker can produce 100 shirts or 10 computers.
a) Graph the production possibilities frontier for the 2 countries. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point on your graph.
b) If these countries were open to trade, which country would export shirts? Which country would benefit from trade? Explain.
c) Explain at what price of computers (in terms of shirts) the 2 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 well-being of the citizens of the 2 countries?