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SupposeChinaandIndia are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs: Table 1. Production of Wheat
SupposeChinaandIndia are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:
Table 1. Production of Wheat or Cotton in China and India.
The Opportunity Costs of producing one product or the other are displayed.
1000's of Tons of
Wheat Bushels Cotton
Nation Produced or Produced
China 110 or 80
India 45 or 90
- Which nation has the comparative advantage in producing Wheat? Which nation has the comparative advantage in producingCotton? Explain how you arrived at these conclusions.
- Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Wheat and which nation should specialize in producingCotton, and why?
- Suppose a trade proposal is made to exchange 1 thousand Bushels of Wheat for 1.2 tons ofCotton. Would these terms-of-trade (1 Wheat :1.20Cotton ) be acceptable to, and mutually beneficial for bothChina and India as trading partners? Why or why not?
- What are the "payoffs" from open trade? What are some of the limitations associated with open trade?
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