Question

The maximum amount of steel or aluminum that Canada and France can produce if they use all the factors of production at their disposal with the best technology available to them is shown (hypotheti-cally) in Table 2.8.

Table 2.8 Steel and auto Production
                                   Canada.           France
Steel (tons)               500.                  1,200
Aluminum (tons)     1,500                  800

Assume that production occurs under constant-cost conditions. On graph paper, draw the produc-tion possibilities frontiers for Canada and France; locate aluminum on the horizontal axis and steel on the vertical axis of each country’s graph. In the absence of trade, assume that Canada produces and consumes 600 tons of aluminum and 300 tons of steel and that France produces and consumes 400 tons of aluminum and 600 tons of steel. Denote these autarky points on each nation’s production possibilities frontier.

a. Determine the MRT of steel into aluminum for each nation. According to the principle of comparative advantage, should the two nations specialize? If so, which product should each country produce? Will the extent of specializa-tion be complete or partial? Denote each nation’s specialization point on its production possibilities frontier. Compared to the output of steel and aluminum that occurs in the absence of trade, does specialization yield increases in output? If so, by how much?

Answer 1

Key points: Due to constant cost condition, PPF is a straight line and not a curve.

: Canada's PPF is denoted by the blue line in the image.

: France's PPF is denoted by the line drawn by the pencil in the image.

: Autarky is a self-sufficient point, where the economy doesn't trade and can only consume whatever it produces. Which is denoted by the red point on the respective PPF.  

Marginal Rate of Transformation is defined as the unit of one good must be given up to consume or produce an additional unit of the other good.

The opportunity cost of producing steel for Canada = 500/1500 = 1/3

The opportunity cost of producing steel for France = 1200/800 = 3/2 = 1.5

Hence, the opportunity cost of producing steel is less in Canada than in France. Hence Canada should specialize in producing  Steel.

The opportunity cost of producing aluminum for Canada = 1500/500 = 3

The opportunity cost of producing aluminum for France = 800/1200 = 2/3 = 0.6666

Hence the opportunity cost of producing aluminum is less in France than in Canada. Hence France should specialize in producing aluminum.

The extent of specialization would be complete.

Producing what both countries are specializing in and trading with each other can help them to consume beyond their PPF.

In the absence of trade, Canada produces and consumes 300 tons of steel, but with complete specialisation, it produces 500 tons of steel and can exchange it for aluminum with France. Likewise, In the absence of trade, France produces and consumes 400 tons of aluminum but with complete specialization, now France can produce  800 tons of aluminum and can exchange it for steel with Canada.