Essentials of Economics 7th Edition by Gregory Mankiw

Exercise 11

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 curve for the two countries. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graph.
b. If these countries were open to trade, which country would export shirts? Give a specific L. numerical example and show it on your graph. Which country would benefit from trade? Explain.
c. Explain what price of computers (in terms of r shirts) the two countries might trade.
d. Suppose that China catches up with American productivity so that a Chinese worker can pro-duce 100 shirts or 20 computers. What pattern y of trade would you predict now? How does this advance in Chinese productivity affect the h economic well-being of the citizens of the two countries?