CHOONG RONG MING 239989

Assume that two countries, Malaysia and Bangladesh, both have 400 units of resources that
could either be used to produce palm oil or jute. In Malaysia, it takes 5 units of resources to
produce one ton of palm oil and 10 units of resources to produce one ton of jute. On the other
hand, in Bangladesh it takes 20 units of resources to produce one ton of palm oil and 10 units
resources to produce one ton of jute. It also assume that consumption after Malaysia trades 20
tons of palm oil for 20 tons of Bangladeshi jute. Calculate the absolute advantage and the gains
from trade with figure.

Absolute Advantage Gain from Trade

Resources Required to Produce 1 ton of Palm Oil and Jute
Palm Oil Jute
Malaysia 5 10
Bangladesh 20 10

Production and Consumption without Trade

Palm Oil Jute
Malaysia 40 20
Bangladesh 10 20
Total production 50 40

Production with Specialization

Palm Oil Jute
Malaysia 80 0
Bangladesh 0 40
Total production 80 40
CHOONG RONG MING 239989

Consumption After Malaysia Trades 20 Tons of Palm Oil for 20 Tons of Bangladesh Jute
Palm Oil Jute
Malaysia 60 20
Bangladesh 20 20

Increase in Consumption as a Result of Specialization and Trade

Palm Oil Jute
Malaysia 20 0
Bangladesh 10 0

Without trade
Malaysia would produce 40 tons of palm oil and 20 tons of jute
South Korea would produce 20 tons of jute and 10 tons of palm oil
With specialization and trade
Malaysia would produce 80 tons of palm oil
Bangladesh would produce 40 tons of jute
Malaysia could trade 20 tons of palm oil to Bangladesh for 20 tons of jute
After trade
Malaysia would have 60 tons of palm oil and 20 tons of jute
Bangladesh would have 20 tons of jute and 20 tons of palm oil
Thus:
Malaysia would have increased of 20 tons of palm oil and remain the same tons of jute
productions
Bangladesh would have increased of 10 tons of jute and remain the same tons of palm oil
productions

!!!Each country specializes in the production of the good in which it has an absolute advantage
and trades for the other, both countries gain