Student Workpoint 21.2 (Why do countries trade? p263)

1. (See table)

2. (See figure 1.1)

3. Yes, trade should occur between China and Pakistan. China has an absolute advantage in producing both goods, however, it only has a comparative advantage in producing rice. For China the opportunity cost of producing 1 kilo of rice is 4/5, while for Pakistan it's 1. Pakistan has a comparative advantage in producing meters of cloth. For Pakistan the opportunity cost of producing 1 meter of cloth is 1, while for China it's 5/4. If a comparative/absolute advantage is present, then mutual benefit will occur through trade between the two countries.

4. Since China has a comparative advantage in producing rice, it should specialize in producing rice. China is more efficient at producing rice than Pakistan. As for Pakistan, it has a comparative advantage in producing meters of cloth, and therefore it should specialize in producing meters of cloth. The exact opportunity costs can be seen on the table and in the preceding sentences (#3).