Review the numbers for Canada and Venezuela from Table 19.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.

a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.

b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are

willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this “ask” as the relative price or trade price of lumber.

c. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

Step by step solution

01

Step1. Given Information

The Following output/labor table is given:

	Oil	Lumber
Canada	20	40
Venezuela	60	30

Also given, 100 workers in each country.

02

Step2. a) Introduction

Plotting PPC

Output table with respect to 100 workers:

	Oil	Lumber
Canada	20*100=2000	4000
Venezuela	6000	3000

Canada:

To plot PPC, we need 2 points. In our case, when 0 barrels of oil is produced, we can produce $4000$ units of lumber. Similarly, we can produce $2000$ barrels of oil when we produce 0 units of lumber.

Points- $(4000,0)and(0,2000)$

The slope of PPC for Canada: m= $2000-0/0-4000$

= $-0.5$

Line equation-

y= $-0.5x+2000$

So, the point where lumber (x) is 3000-

y=$-0.5\left(3000\right)+2000$

y= 500

Hence, the point as marked on the PPC curve is $(3000,500)$

Similarly, for Venezuela, the points are-

$(3000,0)and(0,6000)$

PPC-

Image Caption

03

Step3. b) Calculation

Canadians can produce 4000 units of lumber or 2000 barrels of Oil.

If they give up 1000 units of lumber for trade, they should ask for-

$2000*1000/4000=500$ barrels of oil in return to be just as well off as they were without trade.

To gain from trade, they must ask for more than 500 barrels of oil in return for 1000 units of lumber.

04

Step4. c) Explanation

Venezuela benefits from the trade. It is giving up 500 barrels of oil.

If we compare the output capacity of Venezuela,

Venezuela can produce $2000*500/6000=250$ units of lumber along with 500 barrels of oil.

Canada via trade will exchange 1000 units of lumber as compared to 250 units it needs to be just as well as without trade.

Hence, Venezuela benefits from trade as well.

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