Both Canada and the United States produce lumber and...

Both Canada and the United States produce lumber and footballs with constant opportunity costs. The United States can produce either 10 tons of lumber and no footballs, or 1,000 footballs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no footballs, or 400 footballs and no lumber, or any combination in between. a. Draw the U.S. and Canadian production possibility frontiers in two separate diagrams, with footballs on the horizontal axis and lumber on the vertical axis. b. In autarky, if the United States wants to consume 500 footballs, how much lumber can it consume at most? Label this point $A$ in your diagram. Similarly, if Canada wants to consume 1 ton of lumber, how many footballs can it consume in autarky? Label this point $C$ in your diagram. c. Which country has the absolute advantage in lumber production? d. Which country has the comparative advantage in lumber production? Suppose each country specializes in the good in which it has the comparative advantage, and there is trade. e. How many footballs does the United States produce? How much lumber does Canada produce? f. Is it possible for the United States to consume 500 footballs and 7 tons of lumber? Label this point $B$ in your diagram. Is it possible for Canada at the same time to consume 500 footballs and 1 ton of lumber? Label this point $D$ in your diagram.

Both Canada and the United States produce lumber and footballs with constant opportunity costs. The United States can produce either 10 tons of lumber and no footballs, or 1,000 footballs and no lumber, or any combination in between. Canada can produce either 8 tons of lumber and no footballs, or 400 footballs and no lumber, or any combination in between.
a. Draw the U.S. and Canadian production possibility frontiers in two separate diagrams, with footballs on the horizontal axis and lumber on the vertical axis.
b. In autarky, if the United States wants to consume 500 footballs, how much lumber can it consume at most? Label this point $A$ in your diagram. Similarly, if Canada wants to consume 1 ton of lumber, how many footballs can it consume in autarky? Label this point $C$ in your diagram.
c. Which country has the absolute advantage in lumber production?
d. Which country has the comparative advantage in lumber production?
Suppose each country specializes in the good in which it has the comparative advantage, and there is trade.
e. How many footballs does the United States produce? How much lumber does Canada produce?
f. Is it possible for the United States to consume 500 footballs and 7 tons of lumber? Label this point $B$ in your diagram. Is it possible for Canada at the same time to consume 500 footballs and 1 ton of lumber? Label this point $D$ in your diagram.

Key Concepts

Production Possibility Frontier (PPF)

The production possibility frontier is a curve that shows all the maximum possible combinations of two goods that a country can produce given fixed resources and technology. It illustrates the trade-offs and opportunity costs involved in changing the production mix between the two goods, emphasizing the limits of production capacity.

Opportunity Cost

Opportunity cost represents the cost of forgoing the production of one good in order to produce an additional unit of another good. In the context of constant opportunity costs, this trade-off is linear, meaning that the rate at which one good is sacrificed for another remains constant along the production possibility frontier.

Autarky

Autarky refers to the situation in which a country operates in economic isolation, producing all goods for its own consumption without engaging in international trade. Under autarky, consumption possibilities are limited to the country's own production capabilities as represented by its PPF.

Absolute Advantage

Absolute advantage is the ability of a country to produce more of a good using the same amount of resources as another country. This concept focuses on overall productivity and efficiency, determining which country can produce a greater quantity of a good when compared directly.

Comparative Advantage

Comparative advantage is found when a country can produce a good at a lower opportunity cost compared to another country. It highlights the benefits of specialization and trade, as even if one country has an absolute advantage in producing all goods, it can still benefit from trade by specializing in the good for which it has the lowest relative cost.

Specialization and Trade

Specialization and trade involve countries focusing on producing goods for which they have a comparative advantage and then exchanging these goods with other countries. This leads to an expansion of the effective consumption possibilities for all countries involved, as it allows them to enjoy a mix of goods beyond what they could produce on their own.

Transcript

00:05 Canada and the u .s.

00:06 Can both produce footballs and lumber.

00:09 In the u .s., we can produce either, with all of our resources, 10 tons of lumber and no footballs, or we could produce 1 ,000 footballs and no lumber, or any combination in between if we split our resources between the two.

00:29 Canada can do 8 tons of lumber if it only does lumber, 400 footballs if it only does footballs.

00:38 So the two graphs show those production possibilities, the u .s.

00:42 On the left and canada on the right.

00:46 So if without trade, the u .s.

00:49 Wants to consume 500 footballs, then according to my production possibilities frontier, that would leave us enough resources, half of our resources to produce five tons of lumber.

01:02 So that's point a.

01:03 On the u .s.

01:05 Graph.

01:07 If canada wanting to consume one ton of lumber, then it would be able to consume 350 footballs, and so that's point c on the canada graph.

01:19 We want to know who has the absolute advantage in producing lumber.

01:23 Well, the u .s.

01:24 Would have the absolute advantage because they can produce more, 10 tons in the u .s.

01:31 Versus only eight in canada.

01:33 But then to find the comparative advantage in lumber, we have to figure our opportunity cost in both countries.

01:42 And so starting with the u .s., the way we would figure that opportunity cost would be to say, well, if we produce 10 tons of lumber, then that would cost us our 1 ,000 footballs...

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