The Treaty of Tientsin was signed on September 3, 1871; it established free trad

Question

The Treaty of Tientsin was signed on September 3, 1871; it established free trade between China and Japan. As a result of this treaty suppose all tariffs between China and Japan were abolished. Assume that prior to the signing of the treaty, no formal trade whatsoever existed between these countries, but after September 3, 1871 rice and soybeans were freely traded.

If it takes the Japanese 14 hours to harvest a ton of rice and ten hours to harvest a ton of soybeans, but the Chinese spend 18 and 12 hours respectively for harvesting the same products, calculate who has the comparative advantage. Further assume each country has 216 hours available to harvest crops, and before free trade began the harvest time was divided equally domestically.

Also assume each hour of harvest time costs 7 yuan in China, but 1 yen in Japan; calculate the average yuan/yen exchange rate. Both Japan and China demand 20 tons of rice and 8 tons of soybeans, and the average yuan/yen exchange rate prevails.

Use the yuan/yen exhange rate, not the yen/yuan exchange rate, to calculate your answers.

1) Who has absolute advantage?

2) Who has comparative advantage?

3) Draw the "Gains From Trade" diagram

4) What will the average yuan yen exchange rate be?

5) How many yuan will be gained for China by the treaty signing?

6) How many yen will be gained for Japan by the treaty signing?

Explanation / Answer

1. China has absolute advantage because the production cost is low in china ( 1 yen = .06 Yuan)

2. Japan has a comparative advantage because Japan can produce more amount of rice and soybeans in less amount of time (i.e., 24 hours compare to 30 hours)

4. 1 Yen =.06 Yuan

5. 7*28

6. 1*28

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