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International Economics

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.

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International Economics

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  1. International Economics The Principle of Comparative Advantage

  2. 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.

  3. WHEAT COMPUTERS Canada 50 20 U.S. 40 80

  4. Canada’s Production Possibilities Curve Wheat 50 25 0 20 25 50 Computers

  5. U.S. Production Possibilities Curve Wheat 50 40 25 75 80 0 25 50 Computers

  6. Canada Uses ½ of its resources for each good (Point A) Wheat 50 A 25 0 10 20 25 50 Computers

  7. U.S. Uses ½ of its resources for each good (Point B) Wheat 50 40 25 B 20 75 80 0 25 50 40 Computers

  8. World Production of Wheat and Computers (No Specialization) Wheat Computers Canada 25 10 U.S. 20 40 World 45 50

  9. 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

  10. 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?

  11. If Canada specializes in producing wheat (Point A’) Wheat A’ 50 25 0 20 25 50 Computers

  12. If the U.S. specializes in producing computers (Point B’) Wheat 50 40 25 B’ 75 80 0 25 50 Computers

  13. 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.

  14. What are the limits on the terms of trade? 1 bushel of wheat = 2/5 computers 1 bushel of wheat = 2 computers

  15. Suppose the actual terms of trade between the two goods is 1 bushel of wheat = 1.25 computer. We can then draw the consumption possibilities curve for each country.

  16. Canada’s Consumption Possibilities Curve (Red Line) Wheat 50 25 0 20 25 40 50 Computers

  17. U.S. Consumption Possibilities Curve (Red Line) Wheat 50 40 25 75 80 0 25 50 Computers

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