HINT: Observe the opportunity cost of computers (in terms of tennis shoes) for both China and the United States. The terms of trade would be some amount in between the two opportunity costs. 4. Suppose that the United States and China were trying to negotiate a trade deal. If either country EXCHANGE Computers Tennis Shoes uses all of its labor for the purpose of producing only computers or only tennis shoes, then the United States two countries can produce the following of each good. China TOTAL Computers Tennis Shoes United States 100 OR 200 China 50 OR 250 e. This class presented a very simplified model to emphasize how trade makes two countries for two individuals) better off. One simplifying assumption made in this model is that a. Suppose that the United States and China did not trade with each other and, instead, trade can be done at zero cost. Is this the case in real life? If not, does this affect whether divided their labor evenly between producing computers and producing tennis shoes. How trade can be seen as beneficial for both parties involved? How would the idea that trade is many of each good would each country produce and show how many of each good would not costless affect the amount of trade that would exist (relative to if trade is without cost)? be produced in total. Explain. AUTARKY Computers Tennis Shoes United States 100 China 25 125 TOTAL 75 225 b. Determine the opportunity cost for each country to produce each good. Identify which good each country has a comparative advantage in. OPPORTUNITY COST Computers Tennis Shoes (in terms of Tennis Shoes) (in terms of Computers) United States China Suppose that each country specializes according to their comparative advantage. Give an example of the number of computers and of tennis shoes each country produces, such that the total amount of each good produced with each country specializing is greater than the total amount of each good produced with each country producing without specializing. SPECIALIZATION Computers Tennis Shoes United States China TOTAL d. Provide an example of the terms of trade that both countries could agree to (ex: the U.S. gives x units of one good to China in exchange for y units of another good), such that it's the case that both countries have more tennis shoes and more computers than they would have under autarky