Exercise 2
Suppose that in the United States, 4 man-hours are required to produce each unit of clothing and each unit of food. In Canada, 1 man-hour is required for each unit of clothing and 2 man-hours are required for a unit of food.
1. Which country has an absolute advantage in each good?
2. Which country has comparative advantage in each good?
3. Assuming that each country has 40 man-hours of labor available for production, draw the production possibilities frontiers for each country. (Put food on the vertical axis.) What do the slopes of these frontiers indicate?
4. Draw the world production possibilities frontier (defined as the maximum amount of goods that can be produced worldwide for a fixed amount of resources). What does its slope indicate?
5. If consumers in both countries have identical Leontief preferences, so that goods are perfect complements and individuals always consume clothing and food in the fixed proportion of one-to-one, what is the trade pattern? (hint: when goods are always consumed in fixed proportions, the relative demand will be fixed as well). Derive the exact value of each country’s exports and imports.