Question

One July, the United States sold aircraft worth \(\$ 1\) billion to China and bought aircraft worth only \(\$ 19,000\) from China. During the same month, however, the United States bought \(\$ 83\) million worth of men's trousers, slacks, and jeans from China but sold only \(\$ 8,000\) worth of trousers, slacks, and jeans to China. Using what you have learned about how trade is determined by comparative advantage, answer the following questions. a. Which country has the comparative advantage in aircraft production? In production of trousers, slacks, and jeans? b. Can you determine which country has the absolute advantage in aircraft production? In production of trousers, slacks, and jeans?

Short answer

Answer: The United States has a comparative advantage in aircraft production, while China has a comparative advantage in trousers, slacks, and jeans production.

Step-by-step solution

Analyze the trade of aircraft between United States and China

In July, the United States sold aircraft worth \(1\) billion to China, while China sold aircraft worth only \(19,000\) to the United States. This trade pattern suggests that the United States has a comparative advantage in aircraft production.

Analyze the trade of trousers, slacks, and jeans between United States and China

In the same month, the United States bought \(\$ 83\) million worth of men's trousers, slacks, and jeans from China, while China bought just \(\$ 8,000\) worth of these products from the United States. This trade pattern indicates that China has a comparative advantage in trousers, slacks, and jeans production. #b. Absolute advantage in aircraft production and trousers production# To determine absolute advantage, we would need information about the production capabilities of the two countries when using the same resources. Since the exercise does not provide such information, we cannot directly determine absolute advantage. However, based on the trade patterns, we can infer that the United States has an absolute advantage in aircraft production, as they sold dramatically higher quantities of aircraft to China than they imported. Similarly, we can infer that China has an absolute advantage in trousers, slacks, and jeans production because of the significant difference in the quantities traded.

Key concepts

Absolute Advantage

The concept of absolute advantage refers to the ability of a country to produce a good more efficiently than another country. In simpler terms, if a country can produce more of a product using fewer resources, it has an absolute advantage in producing that product. Understanding this concept requires comparing the output levels of different countries for the same product, assuming they use the same amount of resources.
In the context of the exercise, the United States sold significantly more aircraft to China than it bought from China. This suggests that the U.S. might have an absolute advantage in aircraft production. However, to determine absolute advantage unequivocally, specific data on resource usage and efficiency is necessary.
For trousers, slacks, and jeans, China exported much more to the U.S. than it imported. This trade pattern hints at China's potential absolute advantage in producing these items. Still, like before, without detailed production data, we can only make educated guesses.

International Trade

International trade involves the exchange of goods and services between countries. It allows nations to specialize in the production of goods where they have a comparative advantage while importing goods where other countries excel. This specialization helps improve global efficiency and can lead to lower prices and more variety for consumers.
In our scenario, the trade of aircraft and clothing between the U.S. and China illustrates international trade's fundamental principles. The U.S. exporting a substantial amount of aircraft to China showcases its focus on industries where it excels, while the significant import of clothing from China highlights the U.S.'s reliance on Chinese manufacturing expertise in the textile sector.
International trade is shaped by factors like resource distribution, technology levels, and economic policies. While each country aims to benefit from trade, it is essential to navigate these exchanges thoughtfully to ensure equitable trade relationships.

Trade Patterns

Trade patterns refer to the typical flow of goods and services in and out of a country. These patterns are influenced by each country's comparative and absolute advantages, affecting what they export and import. Observing these patterns can reveal economic strengths and weaknesses as well as the global positioning of a country in various industries.
In the exercise, the trade patterns between the U.S. and China highlight the contrast in industrial focus. The U.S. demonstrates a strong export pattern in aircraft, indicating a strength in high-tech, complex manufacturing. In contrast, China's robust export of clothing like trousers and jeans shows its dominance in the textile industry.
Such patterns are crucial for policy-making and economic planning, helping countries identify sectors that require development or can be harnessed for greater economic gain. By analyzing trade patterns, nations can better understand global market dynamics and adjust strategies accordingly.