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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these nations trade?

a. China will export aircraft, and the United States will export shirts.

b. China will export shirts, and the United States will export aircraft.

c. Both nations will export shirts.

d. There are no gains from trade in this situation.

To determine
Comparative advantage for the export of goods and services.

Explanation

Option (b)

Opportunity cost for China in producing a shirt is 0.0001 units of aircraft (=4/40,000)   and for the U.S., it is 0.0002 units of aircraft (=2/10,000) . Since the opportunity cost in the production of shirts is lower for China than the U.S., China has a comparative advantage in them; therefore, they can export shirts. Similarly, the U.S. has a comparative advantage in the production of aircrafts since the opportunity cost for producing an aircraft (5,000 shirts (=10,000/2) ) is lower for the U

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