Question

Canadian and Japanese workers can each produce 4 cars per year. A Canadian worker can produce 10 tonnes of grain per year, whereas a Japanese worker can produce 5 tonnes of grain per year. To keep things simple, assume that each country has 100 million workers.

a. For this situation, construct a table like what we had in the class.

b. Graph the production possibilities frontier of the Canadian and Japanese economies.

c. For Canada, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table.

d. Which country has an absolute advantage in producing cars? In producing grain?

e. Which country has a comparative advantage in producing cars? In producing grain?

f. Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?

g. Starting from a position without trade, give a numerical example in which trade makes each country better off.

Answer 1

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B) For Japan,

Maximum cars that can be produced per year = 100 million * 4 = 400 million

Maximum grains that can be produced per year = 100 million*5 = 500 million tonnes

For Canada

Maximum cars that can be produced per year = 100 million * 4 = 400 million

Maximum grains that can be produced per year = 100 million*10 = 1000 million tonnes

C) For Canada,

If only cars are produced, then the opportunity cost of producing 400 million cars = 1000 million tonnes of grains

=> Opportunity cost of producing 1 car = 1000/400 = 2.5 tonnes of grains

And opportunity cost of producing 1 tonne of grains = 400/1000 = 0.4 units of cars

For Japan,

If only cars are produced, then the opportunity cost of producing 400 million cars = 500 million tonnes of grains

=> Opportunity cost of producing 1 car = 500/400 = 1.25 tonnes of grains

And opportunity cost of producing 1 tonne of grains = 400/500 = 0.8 units of cars

D) Each country can produce exactly same number of cars per year with given number of workers, so, no country has an absolute advantage here. Although Canada has an absolute advantage in production of grains as it can produce 1000 million tonnes of grains with given number of workers per year while Japan can produce only 500 million tonnes.

E) With lower opportunity cost of 1.25 tonnes of grains per car, Japan has a comparative advantage in production of cars while the opportunity cost of production of grains is 0.4 units per tonne in Canada which is lower than Japan's, giving Canada comparitive advantage in production of grains.

F) In Japan,

50 million workers produce cars per year = 4*50 million = 200 million cars

and 50 million workers produce grains per year = 5*50 million = 250 million tonnes

In Canada,

50 million workers produce cars per year = 4*50 million = 200 million cars

and 50 million workers produce grains per year = 10*50 million = 500 million tonnes