Question

The table below shows the bushels of corn and bottles of wine that China and U.S....

  1. The table below shows the bushels of corn and bottles of wine that China and U.S. can produce from one day of labor under three different hypothetical situations.

Product

Case 1

Case 2

Case 3

China

U.S.

China

U.S.

China

U.S.

Corn(bushels)

4

2

4

1

4

1

Wine(bottles)

2

1

3

2

2

2

                           

1. Suppose in case 2, China exchanges 4 bushels of corn for 4 bottles of wine with U.S.

How much does China gain? Show your work.

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Answer #1

In case 2

Opportunity cost of one unit of corn in US=2 bottles of wines

Opportunity cost of one unit of corn in China=3/4=0.75 bottles of wines

Opportunity cost of corn production is lower in Chine, Chine can specialize in producing corn

Opportunity cost of one bottle of wine in US=1/2 bushel of corn

Opportunity cost of one bottle of wine in China=4/3=1.33 bushel of corn

Opportunity cost of wine production is lower in US, US can specialize in producing wine

Opportunity cost of one unit of corn in China=Relative price of one unit of corn in China=0.75 bottles of wine

Current terms of trade=4/4= 1 bushel of corn/1 bottle of wine

Chine will get 1 bottle of wine in exchange of 1 bushel of corn. It means gain for china

Gain for china=1-0.75=0.25 bottle of wine/Bushel of corn

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