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Chapter 33: Q. 32 (page 805)

In Exercise 33.31, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada?

Short Answer

Expert verified

Yes.

Step by step solution

01

Step1. Introduction

When two countries trade, the asking price refers to the tradeable or relative price comparing which the country decides whether or not to engage in trade.

02

Step2. Explanation

If the asking price is absurd, or they can domestically produce it at a cheaper rate, the country will refuse to trade.

In our case of question 19.31, Venezuela may refuse to trade with Canada, i.e. say "no thank you" if Canada asks for 500 or more barrels of oil in return for 1000 or fewer tons of lumber.

It is so because Venezuela produces oil and lumber in the ratio of 6000/3000= 2:1.

Hence, in such a scenario, Venezuela may choose to say "no thank you" to the trade deal with Canada.

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Most popular questions from this chapter

Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain

Under what conditions does comparative advantage lead to gains from trade?

Can a nation’s comparative advantage change over time? What factors would make it change?

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.

Why does the United States not have an absolute advantage in coffee?
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