- (5 points) Think of one scenario of market transactions where the circular-flow diagram can be used. Draw the circular-flow diagram for both examples and briefly explain..
- (10 points) Suppose that in a year, an American worker can produce 100 shirts OR 20 computers while a Chinese worker can produce 100 shirts OR 10 computers. So our production possibilities for ONE worker over ONE year is:
Shirts per Worker per Year Computers per Worker per Year
U.S. 100 20
China 100 10
(a) Suppose the U.S. has 100 workers (recall the table above shows the production of ONE worker) and China has 100 workers. Draw the PPF for the U.S. and China with shirts on the X-axis and Computers on the Y-axis.
(b) In the U.S., what is the opportunity cost of producing an additional shirt. In China, what is the opportunity cost of producing an additional shirt. Who has comparative advantage in producing shirts? Producing computers?
(c) Recall both countries have 100 workers each. What happens if each country devotes half its workers to each industry. How many shirts and computers does each country produce? Graph these.
(d) Suppose the countries decide to trade. They produce only the good in which they have comparative advantage. The country that specializes in shirts exports 5,000 shirts. The country that specializes in computers exports 750 computers. Graph these points for each country. Compared to your answer in part (d), what does each country gain from trade?
- Describe the wealth tax. Who are its proponents? What is its purpose? What are the potential costs and benefits? (5 points)
Sample Solution