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.

If each country completely specialized according to their comparative advantage, how many pounds of vegetables would be produced total? (in billions of pounds)

Explanation / Answer

Let us compute opportunity cost (OC).

For US,

OC of beef = 35/26 = 1.35 vegetable

OC of vegetable = 26/35 = 0.74 beef

For Canada,

OC of beef = 28/26 = 1.08 vegetable

OC of vegetable = 26/28 = 0.93 beef

Since US can produce vegetable at a lower OC than Canada can, US has comparative advantage in begetable and will specialize in begetable. Since Canada can produce beef at a lower OC than US can, Canada has comparative advantage in beef and will specialize in beef.

Total vegetable produced = Maximum Vegetable produced by US = 35 billion pounds.

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