Comparative advantage, Trading pattern

Relative Cost to produce rice in term of cloth in Vietnam= (cost to produce rice)/(cost to
produce cloth)= (1/6)/(1/4)= 2/3 ~0.67 <

Relative Cost to produce rice in term of cloth in China = (cost to produce rice)/(cost to produce
cloth)= 1/(1/2)= 2 àVN has comparative advantage in producing rice in term of cloth à VN can
specialize in producing rice, export rice, import cloth

Relative Cost to produce cloth in term of rice in VN= 3/2= 1.5 >

Relative Cost to produce cloth in term of rice in CN= ½ =0.5 à Cn has comparative advantage in
producing clothà Cn can specialize in producing cloth, export cloth, import rice

Gains from trade: 6R=6C

Vn export 6 rice, import 6 clothà VN gains from trade 6-4=2 (0.5hrs)

Cn export 6 cloth, import 6 riceà 6R ~6hrsà in 6hrs, Cn can produce 12 clothà Cn gains from
trade 12-6=6 (3hrs)

Cost to produce 1 ton of wheat in US =1/6 < Cost to produce 1 ton of wheat in UK =1 à US
has Absolute Advantage in producing wheat
Cost to produce 1 ton of cloth in US = ¼ < Cost to produce 1 ton of cloth in Uk = 1/3 à US has
Absolute Advantage in producing cloth

Relative Cost to produce wheat in term of cloth in US = (1/6)/(1/4) =2/3 < Relative Cost to
produce wheat in term of cloth in UK = 1/(1/3)=3à US has comparative advantage in producing
wheatà US specialize in producing wheat, export wheat, import cloth

Relative cost to produce cloth in term of wheat in US = (1/4)/(1/6) =3/2 > Relative Cost to
produce cloth in term of wheat in UK =1/3à UK has comparative advantage in producing clothà
UK specialize in producing cloth, export cloth, import wheat

Gains from trade: 6W=6C

US gain from trade: 6C-4C=2C (0.5hrs)

UK import 6W, export 6C. To produce 6 W, UK spends 6hrsà In 6hrs, UK can produce 6hrs*3 =18
clothà UK gains from trade is 18-6= 12 C (4hrs)

US UK The world
Steel Rice Steel Rice Steel Rice
Productivity 6 4 1 2
(ton/hr)
Absolute 1/6 1/4 1 1/2
Cost
Relative Cost to produce Cost to 1/(1/2)=2 1/2
Cost= steel/cost to produce
opportunity produce rice rice/ cost to
cost =productivity produce
rice/productivity steel=
steel =4/6= productivity
(1/6)/(1/4)=2/3 of steel/
productivity
of rice=
 6/4=3/2
Before trade
Hours of 500 500 500 500
labor time
Output 3000 2000 500 1000 3500 3000
(tons)
After trade
Hrs of labor 1000 0 0 1000
time
Output(tons 6000 0 0 2000 6000 2000
)