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IELM 141 Spring 2011
Homework 1
Due 18th March 2011 (Fri) at the Beginning of Class

Problem 1: International Trade
In ancient times, China and Egypt were two prosperous civilization centers. People in both countries demanded two products: silk cloth and spices. In order to produce silk cloth, both countries had to plant mulberry trees and use the leaves to feed silkworms. The silkworms would then produce silk thread that could be converted into silk cloth. To produce spices, spiceberries had to be planted. Therefore, the common resource required to produce both types of goods was farmland.
China had more farmlands, endowed with 9,000 hectares (unit for land area), while Egypt had 3,000 hectares. The climates of these countries were different. Chinas climate was more suitable for planting mulberry trees, and spiceberries grew better in Egypt. Therefore, the sizes of farmland needed to produce one unit of each product were different in the two countries, as shown in the following table:
China Egypt
Silk Cloth 1 hectares 2 hectares
Spice 25 hectares 20 hectares

a.
Which country had absolute advantage in producing silk cloth? Why? China. It is because China needs less hectares to produce each silk cloth.

b.
Which country had absolute advantage in producing spices? Why? Egypt. It is because Egypt needs less hectares to produce spice.

c.
How many units of silk cloth did China have to give up in order to produce 1 unit of spices (i.e., the opportunity cost for producing 1 unit of spices)? The opportunity cost for producing 1 spice: 25/1=25.

d.
How many units of spices did Egypt have to give up in order to produce 1 unit of silk cloth? (i.e., the opportunity cost for producing 1 unit of silk cloth) The opportunity cost for producing 1 silk cloth: 2/20 = 1/10.

e.
Which country/countries had comparative advantage in producing silk cloth and spices, respectively? Why?


Egypt has the comparative advantage to produce spice because the opportunity cost of Egypt to produce spice is lower than that of China. China has the comparative advantage to produce silk cloth because the opportunity cost of China to produce silk cloth (1/25) is lower than that of Egypt (2/20).
f.
Suppose China only produced spices and Egypt only produced silk cloth. How much of each product will be produced in the whole world (consisting of only two countries) combined?

g.
Suppose Egypt used half of its total farmlands to produce each product. And China used 2/3 of its total farmlands on spices and 1/3 on silk cloth. How much of each product will be produced in the whole world combined?

h.
Is it possible that the countries engage in trade and both benefit (i.e., both countries end up with more of both products) compared to the case in (g)? Yes. For example, China used half of its total farmlands to produce each product, while Egypt use all of its farmlands on spice. Then, the output of both products