The table below provides a hypothetical numbers for United States and Canada pro

Question

The table below provides a hypothetical numbers for United States and Canada productions of wheat and automobiles using all their available resources.

                                                            Wheat (bushels)                      Autos

                        United States                          60                                120

                        Canada 160                                80

Based on Ricardo’s principles, what would be the utter limits within which the equilibrium terms of trade (TOT) must fall?  Hint: find the autarky conditions for each country.  If the TOT = 1 auto for 2 bushels of wheat, which country receives all the gains from trade.? Discuss.

Explanation / Answer

Ans

The upper limits are 160/80=2 Auto per bushel of wheat or 120/60=2 bushel of wheat per auto

B Autarky condition for usa is 60/120=0.5 Auto per bushel of wheat and for Canada is 160/80=2 auto per bushel of wheat

C Then Canada will corner all benefits because the greater the rate is to Autarky terms of trade of USA, the greater the benefits cornered by Canada.

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