Using the data in the accompanying table, answer the following questions: a. For which good does Canada have a comparative advantage? b. For which good does Italy have a comparative advantage? c. What might be a set of favorable terms of trade for the two countries?

Using the data in the accompanying table, answer the following questions: a. For which good does Canada have a comparative advantage? b. For which good does Italy have a comparative advantage? c. What might be a set of favorable terms of trade for the two countries?

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 4P

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

Using the data in the accompanying table, answer the following questions:

a. For which good does Canada have a comparative advantage?
b. For which good does Italy have a comparative advantage?
c. What might be a set of favorable terms of trade for the two countries?
d. Prove that both countries would be better off in the specialization-trade case than in the no-specialization-no-trade case.

Canada
Ihaly
Points on
Production
Possibilities
Frontier
Good X
Good Y Good X
Good Y
A
150
90
B
100
25
60
60
50
50
30
120
D
75
180

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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