1. Use the data below to determine if either country has a comparative advantage
ID: 1228337 • Letter: 1
Question
1. Use the data below to determine if either country has a comparative advantage in oil or corn production, and calculate the gains from trade if there is a trade of 20 barrels of oil for 20 bushel of corn.
Canada United States
Corn(bushels)
Oil (barrels)
Corn (bushels)
Oil (barrels)
0
100
0
50
5
80
20
40
10
60
40
30
15
40
60
20
20
20
80
10
25
0
100
Corn(bushels)
Oil (barrels)
Corn (bushels)
Oil (barrels)
0
100
0
50
5
80
20
40
10
60
40
30
15
40
60
20
20
20
80
10
25
0
100
Explanation / Answer
The Opportunity cost in Canada: 1 bussel of corn = 4 barrels of Oil (i.e. 300 / 75)
The Opportunity cost in US: 1 bussel of corn = 0.5 barrels of Oil (i.e. 300 / 150)
Since the Opportunity cost in US is less, therefore, US has comparative advantage in production of Corn and Canada has comparative advantage in production of Oil.
US will produce 300 bushels of Corn and Canada will produce 300 barrels of Oil.
After trade Canada will receive more than 75 bussels of corn and US will receive more than 150 barrels of Oil.
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