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.

How many more pounds of vegetables (in billions) would there be in the economy as a whole as a result of specialization? (Just numbers to 1 decimal place)

Explanation / Answer

When two countries produce two products, they will be benefitted if they specialize in the maufacturing the product in which it has comparative advantage. First consider the production of food.

In USA, entire resources are used to maufacture either 35 billion pounds of vegetables or 26 billion pounds of beef. Thus production of 1 billion vegetables is equivalent to 26/35=0.742857142 billion pounds of beef. So by producing 1 billion vegetables, opportunity of producing 0.742857142 billion beef is lost. So opportunity cost of producing one billion vegetable is ).742857142 billio.

Now consider Canada. It can produce 28 billion of vegetables or 26 billion pounds of Beef. Thus opportunity cost of 1 billion vegetable is 26/28=0.928571428 billion of Beef. So USA has lower opportuity cost of producing Vegetables. So USA will specialize in maufacturing of vegetables.

Just opposite will be observed for Canada. In Canada opportuity cost of one billion Beef is 28/26=1.076923billion vegetables. In USA it is 35/26=1.346153 billion of vegetables. So cost of Beef is less in Canada. So Canada will specialize in the production Beef.

Answer: Therefore total production of vegetables after specializatio is 35 billion pounds.

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