Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt takes 2 hours of labor. In China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes 4 hours of labor. What will these nations trade?a. China will export aircraft, and the United States will export shirts. b. China will export shirts, and the United States will export aircraft. c. Both nations will export shirts. d. There are no gains from trade in this situation.

The answer is: b

Explanation:

The question is essentially seeking to find out whether the United States (U.S) or China have an advantage in the manufacturing of aircraft or shirts. Comparative advantage is the ability of a person, company or country to perform a task more efficiently than other people, companies or countries. Comparative advantage is analysed by calculating opportunity cost. Opportunity cost is the foregone benefit that arises when one alternative is chosen instead of another.

U.S

If the U.S produces one aircraft, then the opportunity cost would be 5000 shirts (10,000 hours/ 2 hours). If the U.S produces one shirt, then the opportunity cost would be 0.0002 (2 hours /10,000 hours) of an aircraft.

China

If China produces one aircraft, then the opportunity cost would be 10,000 shirts (40,000 hours/ 4 hours). If China produces one shirt, then the opportunity cost would be 0.0001 (4 hours/40,000 hours) of an aircraft.

China has a comparative advantage in making clothes since the opportunity cost for lost shirts is higher (10,000). The U.S has a comparative advantage in aircraft production since the opportunity cost for lost aircraft manufacturing is higher (0.0002). Therefore, China should focus on producing shirts and export them to the U.S whereas the U.S should focus on manufacturing and exporting fleets of aircraft to China.

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