Suppose that US and Canada both produce steel and automobiles. Both countries face constant marginal cost conditions (i.e., straight line PPFs). US can produce a maximum of 1000 tons of steel or a maximum of 500 automobiles when it uses all its inputs to produce one or the other good. Canada can produce a maximum of 2000 tons of steel or 400 automobiles. In autarky, US produces 500 tons of steel and 250 autos. Canada produces 1000 tons of steel and 200 autos. a) Which country has a comparative advantage in production of autos? b) What will be the production gains when these countries start trading? c) Suppose the countries trade at the terms of trade given by 1 auto: 3 tons of steel. Also suppose that the US continues to consumer 250 autos. How many autos will the US export and how many tons of steel would it receive? d) Find the consumption gains from trade for both countries.

Suppose that US and Canada both produce steel and automobiles. Both countries face constant marginal cost conditions (i.e., straight line PPFs). US can produce a maximum of 1000 tons of steel or a maximum of 500 automobiles when it uses all its inputs to produce one or the other good. Canada can produce a maximum of 2000 tons of steel or 400 automobiles. In autarky, US produces 500 tons of steel and 250 autos. Canada produces 1000 tons of steel and 200 autos. a) Which country has a comparative advantage in production of autos? b) What will be the production gains when these countries start trading? c) Suppose the countries trade at the terms of trade given by 1 auto: 3 tons of steel. Also suppose that the US continues to consumer 250 autos. How many autos will the US export and how many tons of steel would it receive? d) Find the consumption gains from trade for both countries.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter33: International Trade

Section: Chapter Questions

Problem 31P: Review the numbers for Canada and Venezuela from Table 33.12 which describes how many barrels of oil...

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Review the numbers for Canada and Venezuela from Table 33.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this ask as the relative price or trade price of lumber. Is the Canadian ask you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.
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