Comparative Advantage under Constant Cost Conditions

The table below shows the maximum output of rice or televisions (TVs) that China and India can produce under constant cost conditions.

TABLE: CHINAandINDIARice and Television Production

	China	India
RICE(BUSHELS) TELEVISIONS (UNITS)	42,000,000 8,400,000	15,000,000 12,000,000

At autarky, China produces and consumes 30,000,000 bushels rice and 5,000,000 TVs, and India produces and consumes 10,000,000 bushels rice and 6,000,000 TVs.

Required:

(i) Determine the marginal rate of transformation for the two products for each country and determine the specialisation and production of the products for the two countries.

(ii) Once specialisation has occurred, has the production output increased for the two products, and if so, by how much?

Suppose the terms of trade betweenChina and Indiais2 bushels of rice for 1 TV set.

Assume that11,000,000 bushelsrice are traded for 5,500,000TV sets.

Required:

(iii) Are the consumers inChinaandIndiabetter off? And If so,by how much?