The following are production possibilities tables for Germany and Canada. Note t
ID: 1251427 • Letter: T
Question
The following are production possibilities tables for Germany and Canada. Note that we are assuming that opportunity costs remain constant along the production possibilities frontier, and that each country produces only these two products. Use the information in the tables to answer subsequent questions.Germany's Production Possibilities Table
Production Alternatives
Product A B C D
Autos 0 40 80 120
Computers 60 40 20 0
Canada's Production Possibilities Table
Production Alternatives
Product A' B' C' D’
Autos 0 60 120 180
Computers 120 80 40 0
Since Canada can produce more of either product than Germany can, is there any reason for Canada and Germany to engage in trade? Explain.
If they trade, which country should specialize in which product and why?
If the Germans are consuming and producing 40 autos and 40 computers before trade and the Canadians are producing and consuming 60 autos and 80 computers before trade, what are the potential gains from trade (if any) in terms of additional production of autos and computers for both countries combined?
Explanation / Answer
Even though Canada can produce more of both, both countries could come out ahead by trading. Canada can make twice as many computers as Germany, but only one and a half times as many cars. This difference (2x vs 1.5x) in production capacity between the two products is what we exploit to get a benefit from trading. If Canada maxes out in computers it will be able to trade them and come out ahead. This is a general rule, each country should make the product where its ratio is the most favorable. Canada is twice as good at making computers. Germany is 2/3 as good at making cars. These are their strengths.
For example isolationist Canada could produce 60 Autos and 80 Computers, but if Canada made 120 computers and zero Autos and Germany made 120 Autos and no computers, Canada could trade 40 computers to Germany for 70 Autos. Then Canada would have 80 Computers and 70 Autos (ten more Autos then it could produce singly) and Germany would have 40 computers and 50 autos (ten more Autos than it could have made) Negotiations could tweak the numbers on this.
Case 1
Germans 40 autos and 40 computers
Canada 60 autos and 80 computers
Total 100 autos, 120 computers
Case 2
Germany 120 autos
Canada 120 computers
Total 120 autos, 120 computers
There are an extra 20 Autos in case 2. Each country could have ten extra Autos.
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