Gains from Trade (20 points):

Put yourself into the shoes of one of Trump's policy advisers.

Particularly, you oversee trade. Further assume, the US is only producing 2 types of goods - coal

and cars. Each US worker is equally productive, and the entire workforce can either produce 10

million cars, or 700 million tons of coal. Similarly to the US, China also only produces cars and

coal, and their workers are also equally productive. However, China can either produce 20

million cars or 3 billion tons of coal. Each country consumes everything it produces/trades (i.e. it

doesn't store coal or cars, or throws them away)

a.

Draw China's and the US's PPF in one graph with coal on the y-axis.

b. Should the US trade with China?

c.

It seems as if China has an absolute advantage in producing both coal and cars. Why

would China be interested in trading with the US?

d. Assume both countries specialize in their comparative advantage, how much coal would

the US produce, how many cars? What about China?

e. What is the most coal China would give up to import 1 million cars? What is the most

cars the US would give up to import 100 million tons of coal?

f. Assume China and the US trade without any tariffs. After trading, the US have 4 million

cars, and 60 million tons of coal. What's the price of coal in terms of cars? At these

terms of trade, are both countries willing to trade?