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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers.

a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs.

b. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade? Explain.

c. Explain at what price of computers (in terms of shirts) the two 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 wellbeing of the two countries’ citizens?

Subpart (a):

To determine

The production possibility frontier.

Explanation

Figure -1 illustrates production possibility frontier.

Figure 1 shows the production possibilities frontiers for the two countries; U.S. and China. In Figure 1, the horizontal axis measures the quantity of shirts produced by both the countries and the vertical axis measures the quantity of computers produced. If either worker of the two countries, that is an American or a Chinese worker devotes all his labor hours in producing shirts, each worker can produce 100 shirts in a year. Then, it is the vertical intercept of the PPF for both the American and the Chinese worker...

Subpart (b):

To determine

Opportunity cost and price of the good.

Subpart (c):

To determine

Opportunity cost and price of the good.

Subpart (d):

To determine

Gains from the trade.

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