Suppose in Vietnam a worker can produce either 16 units of cloth or 2 bicycles while in China a worker can produce either 20 units of cloth or 5 bicycles

Question

a. Which country has an absolute advantage in cloth production? In bicycle production?
b. What is the opportunity cost of 1 unit of cloth in Vietnam? In China?
c. What is the opportunity cost of 1 bicycle in Vietnam? In China?
d. Which country has a comparative advantage in cloth production? In bicycle production?
e. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labor force to cloth production and 60 percent to bicycle production. What is the output of cloth and bicycles for each country and what is the total output of cloth and bicycles between the two countries?
f. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cloth and bicycles in the two countries?
g. Provide a numerical example to show how Vietnam and China can both gain from trade. Assume that the terms of trade are established at 6 units of cloth for 1 bicycle.

Answer 1

a. China has an absolute advantage in the production of both goods.
b. In Vietnam, the opportunity cost of 1 unit of cloth = 1/8 bicycle. In China, the opportunity cost of 1 unit of cloth = 1/4 bicycle.
c. In Vietnam, the opportunity cost of 1 bicycle = 8 units of cloth. In China, the opportunity cost of 1 bicycle = 4 units of cloth.
d. Vietnam has a comparative advantage in cloth production and China in bicycle production.
e.
Cloth Bicycles
Vietnam 400 × 16 = 6,400 600 × 2 = 1,200
China 400 × 20 = 8,000 600 × 5 = 3,000
Total 14,400 4,200

f. If each country specializes, output is:

Cloth Bicycles
Vietnam 1,000 × 16 = 16,000
China 1,000 × 5 = 5,000
Total 16,000 5,000

g.
Vietnam
Output 16,000 units of cloth
Exports 9,000 units of cloth
Consumes 7,000 units of cloth
Imports 1,500 bicycles

China
Output 5,000 bicycles
Exports 1,500 bicycles
Consumes 3,500 bicycles
Imports 9,000 units of cloth