international economics the principle of comparative advantage
TRANSCRIPT
International Economics
The Principle of Comparative Advantage
Assume Two Goods and Two Countries
Canada with its resources can produce 50 bushels of wheat or 20
computers.
US can produce 40 bushels or 80 computers.
WHEAT COMPUTERS
Canada 50 20
U.S. 40 80
Canada’s Production Possibilities Curve
Wheat
Computers
25
50
0 25 5020
U.S. Production Possibilities Curve
Wheat
Computers
25
50
0 25 50 75
40
80
Canada Uses ½ of its resources for each good (Point A)
Wheat
Computers
25
50
0 25 5020
A
10
U.S. Uses ½ of its resources for each good (Point B)
Wheat
Computers
25
50
0 25 50 75
40
80
B20
40
World Production of Wheat and Computers(No Specialization)
Wheat Computers
Canada 25 10
U.S. 20 40
World 45 50
What is Canada’s opportunity cost of producing a bushel of wheat?2/5 of a computer
What is the U.S.’s opportunity cost of producing a bushel of wheat?2 computers
Which company has a comparative advantage in the production of wheat? Canada
What is Canada’s opportunity cost of producing one computer? 5/2 bushels of wheat
What is U.S.’s opportunity cost of producing one computer? ½ bushel of wheat
Which company has a comparative advantage in the production of computers? The U.S. Why?
If Canada specializes in producing wheat (Point A’)
Wheat
Computers
25
50
0 25 5020
A’
If the U.S. specializes in producing computers (Point B’)
Wheat
Computers
25
50
0 25 50 75
40
80
B’
World Production of Wheat and Computers(Specialization)
Wheat Computers
Canada 50 0
U.S. 0 80
World 50 80
World production of BOTH goods is higher under specialization.
What are the limits on the terms of trade?
1 bushel of wheat = 2/5 computers1 bushel of wheat = 2 computers
Suppose the actual terms of trade between the two goods is 1 bushelof wheat = 1.25 computer. We can then draw the consumptionpossibilities curve for each country.
Canada’s Consumption Possibilities Curve (Red Line)
Wheat
Computers
25
50
0 25 5020 40
U.S. Consumption Possibilities Curve (Red Line)
Wheat
Computers
25
50
0 25 50 75
40
80