Suppose that the United States and Canada can each produce two products: lumber

Question

Suppose that the United States and Canada can each produce two products: lumber and beef. Create a table like the one below, showing labor requirements per unit of output for each country.

(Hint: Choose numbers for each country that are easily divisible by one another.) CREATE YOUR OWN DATA FOR THE LABOR REQUIREMENTS!!!

Labor Requirements per Unit of Output

United States

Canada

Lumber

Beef

What does absolute advantage mean? How do you calculate absolute advantage? In what output(s) does the U.S. have an absolute advantage? Explain using the data from your table. In what output(s) does Canada have an absolute advantage? Explain using the data from your table.

What does comparative advantage mean? How do you calculate comparative advantage? In what output(s) does the U.S. have a comparative advantage? Explain using the data from your table. In what output(s) does Canada have a comparative advantage? Explain using the data from your table.

What product should each country export? Why?

United States

Canada

Lumber

Beef

Explanation / Answer

Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

US is able to produce more Lumber and beef as compared to Canada with the same amount of resources. So, United States has an absolute advantage in production of beef and Lumber.

Comparative Advantage

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

United States:

16 lumber = 8 beef

1 lumber = 8/16 = 0.5 beef

1 beef = 16/8 = 2 lumber

Opportunity cost of 1 beef is 2 lumber and 1 lumber is 0.5 beef.

Canada:

8 lumber = 2 beef

1 lumber = 2/8 = 0.25 beef

1 beef = 8/2 = 4 lumber

Opportunity cost of 1 lumber is 0.25 beef and 1 beef is 4 lumber.

Canada has comparative advantage in the production of lumber while United States has comparative advantage in the production of beef because these have lower opportunity cost as compared to other.

So, Canada will produce only Lumber while US produce beef.

United States Canada Lumber 16 8 Beef 8 2

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