1. International Economics The Principle of Comparative Advantage

2. Assume Two Goods and Two Countries Canada with its resources can produce 50 bushels of wheat or 20 computers. US can produce 40 bushels or 80 computers.

3. WHEATCOMPUTERS Canada 5020 U.S. 4080

4. Canada’s Production Possibilities Curve Wheat Computers 25 50 0255020

5. U.S. Production Possibilities Curve Wheat Computers 25 50 02550 75 40 80

6. Canada Uses ½ of its resources for each good (Point A) Wheat Computers 25 50 0255020 A 10

7. U.S. Uses ½ of its resources for each good (Point B) Wheat Computers 25 50 02550 75 40 80 B 20 40

8. World Production of Wheat and Computers (No Specialization) WheatComputers Canada 25 10 U.S. 20 40 World 45 50

9. What is Canada’s opportunity cost of producing a bushel of wheat? 2/5 of a computer What is the U.S.’s opportunity cost of producing a bushel of wheat? 2 computers Which company has a comparative advantage in the production of wheat? Canada

10. What is Canada’s opportunity cost of producing one computer? 5/2 bushels of wheat What is U.S.’s opportunity cost of producing one computer? ½ bushel of wheat Which company has a comparative advantage in the production of computers? The U.S. Why?

11. If Canada specializes in producing wheat (Point A’) Wheat Computers 25 50 0255020 A’

12. If the U.S. specializes in producing computers (Point B’) Wheat Computers 25 50 02550 75 40 80 B’

13. World Production of Wheat and Computers (Specialization) WheatComputers Canada 50 0 U.S. 0 80 World 50 80 World production of BOTH goods is higher under specialization.

14. What are the limits on the terms of trade? 1 bushel of wheat = 2/5 computers 1 bushel of wheat = 2 computers

15. Suppose the actual terms of trade between the two goods is 1 bushel of wheat = 1.25 computer. We can then draw the consumption possibilities curve for each country.

16. Canada’s Consumption Possibilities Curve (Red Line) Wheat Computers 25 50 025502040

17. U.S. Consumption Possibilities Curve (Red Line) Wheat Computers 25 50 02550 75 40 80