Question

Trade induced by comparative advantage. Assume Canada and Columbia each has 800 production units. With one unit of production (a mix of land, labor, capital, and technology), Canada can produce either 120 tons of wheat or 10 tons of coffee. Columbia can produce either 20 tons of wheat or 100 tons of coffee. There appears to be a clear case for trade between Canada and Columbia for wheat and coffee. Assume that without trade Canada will allocate 400 production units to wheat and 400 production units to coffee. Assume that without trade Columbia will allocate 400 production units to coffee and 400 production units to wheat.

How much wheat and coffee can Canada produce and consume without trade?

How much wheat and coffee can Columbia produce and consume without trade?

What is the total production of wheat and coffee for both Canada and Columbia without trade?

Assume Canada and Columbia are good trading partners. Canada agrees to export wheat to Columbia and Columbia agrees to export coffee to Canada. If Canada only produces wheat and Columbia only produces coffee, how much more wheat and coffee can Canada and Columbia share?

At what price will Canada and Columbia equally share in the additional output of both wheat and coffee?

Answer 1

Total productio in canada ( 50% capacity allocated to wheat and 50 % to coffee)

total wheat produce 60 tons (120*50%)

total coffee produce 5 tons (10*50%)

Total production in Colombia

total wheat produce 10 tons (20*50%)

total coffee produce 50 tons ( 100*50%)

TOTAL PRODUCTION WITHOUT TRADE

WHEAT = 70 tons

COFFEE = 55 tons

IF CANADA ONLY PRODUCE WHEAT AND COLOMBIA ONLY COFFEE

total wheat production = 120 tons hence more production of 50 tons ( 120-70) hence canada can share 60 tons wheat to Colombia ( However Colombia consumes only 10 tons wheat and hence canada may export to some other contry remaining 50 tons

total coffee production = 100 tons hence more production of 50 tons ( 100-50) hence Colombia can share 50 tons coffee to canada.( However canada consumes only 5 tons coffee and hence Colombia can export to remaining 45 tons coffee to other country)

Price for export

As stated in question that canada and Colombia are good trading partners , hence they can set transfers price as marginal cost of production plus some fix percentage margin on both the products.it's seems from question that canada can produce wheat cheaply and Colombia can produce coffee cheaply hence they may enter in to barter system.