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.

Following output/labor table is given:

Also given, 100 workers in each country.

Output table with respect to 100 workers:

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(3000) + 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-

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 in order to be just as well off as they were without trade.

In order to gain from trade, they must ask more than 500 barrels of oil in return of 1000 units of lumber.

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

If we compare with 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 of as without trade.

Hence, Venezuela benefits out of trade as well.