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Chapter 8: Problem 1

Both Canada and the United States produce lumber and footballs with constant opportunity costs. The United States can produce either 10 tons of lumber and no footballs, or 1,000 footballs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no footballs, or 400 footballs and no lumber, or any combination in between. a. Draw the U.S. and Canadian production possibility frontiers in two separate diagrams, with footballs on the horizontal axis and lumber on the vertical axis. b. In autarky, if the United States wants to consume 500 footballs, how much lumber can it consume at most? Label this point \(A\) in your diagram. Similarly, if Canada wants to consume 1 ton of lumber, how many footballs can it consume in autarky? Label this point \(C\) in your diagram. c. Which country has the absolute advantage in lumber production? d. Which country has the comparative advantage in lumber production? Suppose each country specializes in the good in which it has the comparative advantage, and there is trade. e. How many footballs does the United States produce? How much lumber does Canada produce? f. Is it possible for the United States to consume 500 footballs and 7 tons of lumber? Label this point \(B\) in your diagram. Is it possible for Canada at the same time to consume 500 footballs and 1 ton of lumber? Label this point \(D\) in your diagram.

Short Answer

Expert verified
Answer: To determine the country with a comparative advantage in lumber production, we should refer to Step 10, where we calculated the opportunity costs for both countries. The country with the lower opportunity cost will have the comparative advantage in lumber production. This conclusion will influence specialization and trade between the two countries, as it indicates which country should specialize in producing lumber and which should specialize in producing footballs (Step 11). This specialization would lead to more efficient production and increased benefits through trade, as illustrated in Steps 12 and 13.

Step by step solution

01

Label Axes for U.S. Production Possibility Frontier (PPF)

Draw a graph with lumber on the vertical axis and footballs on the horizontal axis for the United States.
02

Plot the Extremes of U.S. PPF

Plot the two endpoints for the United States, which are (0, 10) for lumber production only and (1,000, 0) for football production only.
03

Draw the U.S. PPF Line

Connect the two endpoints with a straight line to represent the U.S. production possibility frontier.
04

Label Axes for Canadian PPF

Repeat Steps 1-3 for Canada's PPF, labeling axes for lumber and footballs.
05

Plot the Extremes of the Canadian PPF

Plot the two endpoints for Canada, which are (0, 8) for lumber production only and (400, 0) for football production only.
06

Draw the Canadian PPF Line

Connect the two endpoints with a straight line to represent the Canadian production possibility frontier. #b. Consumption Points in Autarky#
07

Calculate the U.S. Consumption of Lumber in Autarky

If the United States wants to consume 500 footballs, we need to find the production possibility frontier on the U.S. PPF graph. Use the slope of the U.S. PPF line to calculate the amount of lumber that can be produced with 500 footballs. Then label this point \(A\) on the U.S. graph.
08

Calculate the Canadian Consumption of Footballs in Autarky

If Canada wants to consume 1 ton of lumber, we need to find the production possibility frontier on the Canadian PPF graph. Use the slope of the Canadian PPF line to calculate the number of footballs that can be produced with 1 ton of lumber. Then label this point \(C\) on the Canadian graph. #c. Absolute Advantage in Lumber Production#
09

Compare Maximum Lumber Production

Compare the maximum lumber production for both countries (10 tons for the United States and 8 tons for Canada). The country with the higher lumber production has the absolute advantage. #d. Comparative Advantage in Lumber Production#
10

Calculate Opportunity Costs for Both Countries

Calculate the opportunity cost of producing lumber for both countries by dividing the maximum football production by the maximum lumber production. The country with the lower opportunity cost has the comparative advantage in lumber production. #e. Production with Specialization and Trade#
11

Determine Specialized Production

Determine which country specializes in each good based on their comparative advantage. Calculate the amounts of footballs and lumber produced by each country specializing in their respective comparative advantage good. #f. Consumption Points with Trade#
12

Calculate U.S. Consumption with Trade

Determine if it's possible for the United States to consume 500 footballs and 7 tons of lumber by looking at the U.S. PPF with specialization and trade. Label this point \(B\) on the U.S. graph if possible, and explain why or why not.
13

Calculate Canadian Consumption with Trade

Determine if it's possible for Canada to consume 500 footballs and 1 ton of lumber by looking at the Canadian PPF with specialization and trade. Label this point \(D\) on the Canadian graph if possible, and explain why or why not.

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Most popular questions from this chapter

Producers in import-competing industries often make the following argument: "Other countries have an advantage in production of certain goods purely because workers abroad are paid lower wages. In fact, American workers are much more productive than foreign workers. So import-competing industries need to be protected." Is this a valid argument? Explain your answer.

Shoes are labor-intensive and satellites are capitalintensive to produce. The United States has abundant capital. China has abundant labor. According to the Heckscher-Ohlin model, which good will China export? Which good will the United States export? In the United States, what will happen to the price of labor (the wage) and to the price of capital?

The U.S. Census Bureau keeps statistics on U.S. imports and exports on its website. The following steps will take you to the foreign trade statistics. Use them to answer the questions below. i. Go to the U.S. Census Bureau's website at www.census.gov ii. Under the heading "Topics" select "Business" and then select "International Trade" under the section "Data by Sector" in the left menu bar iii. At the top of the page, select the tab "Data" iv. In the left menu bar, select "Country/Product Trade" v. Under the heading "North American Industry Classification System (NAICS)-Based," select "NAICS web application" vi. In the drop-down menu "3-digit and 6 -digit NAICS by country," select the product category you are interested in, and hit "Go" vii. In the drop-down menu "Select 6 -digit NAICS," select the good or service you are interested in, and hit "Go" viii. In the drop-down menus that allow you to select a month and year, select "December" and "2013," and hit "Go" ix. The right side of the table now shows the import and export statistics for the entire year 2013 . For the questions below on U.S. imports, use the column for "Consumption Imports, Customs Value Basis." a. Look up data for U.S. imports of hats and caps: in step (vi), select "(315) Apparel \& Accessories" and in step (vii), select "(315220) Men's and Boys' Cut and Sew Apparel." From which country do we import the most apparel? Which of the three sources of comparative advantage (climate, factor endowments, and technology) accounts for that country's comparative advantage in apparel production? b. Look up data for U.S. imports of grapes: in step (vi), select "(111) Agricultural Products" and in step (vii), select "(111332) Grapes." From which country do we import the most grapes? Which of the three sources of comparative advantage (climate, factor endowments, and technology) accounts for that country's comparative advantage in grape production? c. Look up data for U.S. imports of food product machinery: in step (vi), select "(333) Machinery, Except Electrical" and in step (vii), select "333241 Food Product Machinery." From which country do we import the most food product machinery? Which of the three sources of comparative advantage (climate, factor endowments, and technology) accounts for that country's comparative advantage in food product machinery?

For each of the following trade relationships, explain the likely source of the comparative advantage of each of the exporting countries. a. The United States exports software to Venezuela, and Venezuela exports oil to the United States. b. The United States exports airplanes to China, and China exports clothing to the United States. c. The United States exports wheat to Colombia, and Colombia exports coffee to the United States.

Since 2000 , the value of U.S. imports of men's and boy's apparel from China has more than tripled. What prediction does the Heckscher-Ohlin model make about the wages received by labor in China?
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