(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.
1000’s 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 “payoffs” from open trade? What are some of the limitations associated with open trade?