Question

Who has comparative advantage in each good, and who should produce each good?

8. Suppose the U.S. can produce 10 units of food and 5 units of clothing (or any such linear combination) and Canada can produce 6 units of food and 4 units of clothing (or any such linear combination). If trade occurs between these two countries, which should produce more food and which more clothing?

Answer 1

8.

In U.S.,

The opportunity cost of producing 1 unit of food = 5 / 10 = 0.5 units of clothing.

The opportunity cost of producing 1 unit of clothing = 10 / 5 = 2 units of food.

In Canada.,

The opportunity cost of producing 1 unit of food = 4 / 6 = 0.67 units of clothing.

The opportunity cost of producing 1 unit of clothing = 6 / 4 = 1.5 units of food.

A country can specialize in the production of a good which it can produce at lower opportunity cost than others. So, it is clear from the above calculation that U.S. has a comparative advantage in production of food, because U.S. produces food at lower opportunity cost than Canada. And Canada has a comparative advantage in production of clothing, because Canada produces clothing at lower opportunity cost than U.S.

Thus, U.S. should produce more food and Canada should produce more clothing.