The following are production possibilities tables for Germany and Canada. Note t
ID: 1251462 • 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
a.) Since Canada can produce more of either product than Germany can, is there any reason for Canada and Germany to engage in trade? Explain.
b.) If they trade, which country should specialize in which product and why?
c.) 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?
Production Alternatives
Product
A
B
C
D
Autos
0
40
80
120
Computers
60
40
20
0
Explanation / Answer
a & b) While Canada may have an absolute advantage, it is the comparative advantage that matters for trade Germany gives up producing 20 computers for 40 cars they produce, an opportunity cost of 1/2 a computer for every car, Canada gives up producing 40 computers for every 60 cars the produce, an opportunity cost of 2/3 a computer for every car. In these terms, it is more expensive for Canada to produce cars Conversely, Germany has an opportunity cost of 2 cars for every computer, and Canada has an opportunity cost of 3/2 a car for every computer. In these terms it is more expensive for Germany to produce computers. So Canada has the comparative advantage in production of computers, and Germany has the comparative advantage in the production of autos Given their comparative advantages, Canada should specialize in the production of cars, and Canada in the production of computers c) If each country specialized in exclusively producing the good where they have the comparative advantage, they would go from producing and consuming a total 100 autos and 120 computers, to producing a total of 120 autos and 120 computers.
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