Both Canada and the U.S. can produce agricultural products. Let\'s say that the

Question

Both Canada and the U.S. can produce agricultural products. Let's say that the U.S. produces 35 billion pounds of vegetables in a year or 26 billion pounds of beef. Canada can produce 26 billion pounds of beef per year or 28 billion pounds of vegetables. Let’s assume that the two trading partners can only produce these two goods and that they can only trade with each other. Let’s also simplify this by assuming that there are not diminishing returns to investment, so the PPF for each country is not bowed out.

If each country completely specialized according to their comparative advantage, how much beef would be produced? (in billions of pounds)

Explanation / Answer

For this we need to look at the opportunity cost concept.

U.S opportunity cost of producing vegetables is: 35V = 26B, that is, 1V = (26/35)B

Canada opportunity cost of producing vegetables is: 28V = 26B, that is, 1V = (26/28)B

So, U.S has a comparative advantage in vegetables because its opportunity cost is less.

U.S opportunity cost of producing vegetables is: 35V = 26B, that is, 1B = (35/26)

Canada opportunity cost of producing vegetables is: 28V = 26B,  that is, 1B = (28/26)

So, canada has comparative advantage in producing beef.

Now from the data we can say that U.S. will produce maximum 35 billions of vegetables and Canada will produce 26 billions of beef.

So, If each country completely specialized according to their comparative advantage, 26 billions beef would be produced.

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