Question

Consider the Ricardian model taught in the class with only two countries in the
world, China and Singapore, producing two goods Rice and Cloth. China has comparative
advantage in Cloth and Singapore in Rice！Ricardian model says they should specialize
according to their comparative advantage. Why China may not follow such a rule, while
for Singapore it is not a concern?

Answer 1

China has a comparative advantage in clothing and Singapore has a comparative advantage in rice. However, in case of market economy, the firms would make a decision in which the countries have a comparative advantage.

In case of a planned economy, everything is pre-planned. Moreover, what people will consume or will sell is also pre planned. Therefore, in planned economy, China might not be aware that it has an advantage to produce cloth. Therefore, China will not produce cloth. Moreover, China might be having advantage in other sectors, so China will love it's labourers to produce other things in which they have more comparative advantage from the cloth industry. However, Singapore being a market economy as no such restrictions. Singapore us a all countries will a small labour force. Singapore might have a comparative advantage in producing rice than any other sector. Hence, Singapore will be producing only rice.