Both countries have an absolute advantage in both goods because they both produc
ID: 1199717 • Letter: B
Question
Both countries have an absolute advantage in both goods because they both produce boots and shirts. Canada has an absolute advantage in both goods because it can produce more boots and more shirts. Suppose initially that the United States is consuming 4 boots and 8 shirts and Canada is consuming 18 boots and 2 shirts, as indicated in the figure. Then, suppose the United States and Canada specialize by each only producing the good for which they have a comparative advantage and then trade. In particular, suppose the United States trades Canada half of its production for half of what Canada produces. The United States will have additional shirt(s) after the trade (enter a numeric response using an integer) and additional boot(s). At the same time, Canada will be able to consume additional shirt(s) as a result of the trade and additional boot(s).Explanation / Answer
Answer. US has comparative advantage in shirts. It will be able to produce a total of 24 shirts.
Canada has comparative advantage in boots. It will produce a total of 26 boots.
As per the trade agreement, US trades 12 shirts for 13 boots of Canada.
US after trade will have 13 boots and 12 shirts. Its consumption is 4 boots and 8 shirts. Thus an excess of 9 boots and 4 shirts.
Canada after trade will have 13 boots and 12 shirts. Its consumption is 18 boots and 2 shirts. Thus it will need 5 more boots. It can give its 10 shirts and get 5 more boots from US.
Thus only US will have an excess of 14 shirts and 4 boots after trade.
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