1. Using the data in the table, answer the questions that follow: a. In which go

Question

1. Using the data in the table, answer the questions that follow:

a. In which good does Canada have absolute advantage and in which good does Italy

have absolute advantage? Explain your answer.

b. In which good does Canada have a comparative advantage and in which good does

Italy have a comparative advantage? Explain your answer.

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.

Points on
Production
Possibilities CANADA ITALY
Frontier GOOD X GOOD Y GOOD X GOOD Y

A 150 0 90 0

B 100 25 60 60

C 50 50 30 120

D 0 75 0 180

Explanation / Answer

Absolute advantage is when a country uses less resources to produce a good. The US and Canada both have a workforce of 100 people. It takes the US less worker weeks to assemble computers than Canada, but Canada has an absolute advantage in timber production as they can cut more trees than the US in the same number of worker weeks.

Comparative advantage speaks in terms of opportunity costs. A country has a comparative advantage in the production of a good if it can do it at a LOWERopportunity cost than another country. (comparative advantage is used for trade). The US can produce 100 computers or 50 trees with 100 workers. Canada can produce 50 computers or 150 trees with 100 workers. US has the comparative advantage in computers because to make 1 tree they give up 2 computers. Canada gives up 3 trees when they make 1 computer so Canada has a comparative advantage in trees.

So

A 125 or100 B 80 or 30 C 60 50 20 100 D 0 65 0 110

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