Mexico and the United States can both produce food and toys....

Mexico and the United States can both produce food and toys. Mexico has 100 workers and the United States has 300 workers. If they do not trade, the United States consumes 10 units of food and 10 toys, and Mexico consumes 4 units of food and 1 toy. The following table shows how many workers are necessary to produce each good: $$\begin{array}{lcc} \hline & \text { Mexico } & \text { United States } \\ \hline \text { Workers per unit of food } & 12.5 & 5 \\ \text { Workers per toy } & 50 & 15 \\ \hline \end{array}$$ a. In the absence of trade, how many units of food and toys can the United States produce? How many can Mexico produce? b. Which country has a comparative advantage in producing food? In producing toys? c. Draw the production possibility frontier for each country and show where the two produce without trade. Label the axes accurately. d. Draw the production possibility frontier with trade. e. Show that both countries can benefit from trade. (Hint: See Solved Problem 10.4.) A

Mexico and the United States can both produce food and toys. Mexico has 100 workers and the United States has 300 workers. If they do not trade, the United States consumes 10 units of food and 10 toys, and Mexico consumes 4 units of food and 1 toy. The following table shows how many workers are necessary to produce each good:
$$\begin{array}{lcc}
\hline & \text { Mexico } & \text { United States } \\
\hline \text { Workers per unit of food } & 12.5 & 5 \\
\text { Workers per toy } & 50 & 15 \\
\hline
\end{array}$$
a. In the absence of trade, how many units of food and toys can the United States produce? How many can Mexico produce?
b. Which country has a comparative advantage in producing food? In producing toys?
c. Draw the production possibility frontier for each country and show where the two produce without trade. Label the axes accurately.
d. Draw the production possibility frontier with trade.
e. Show that both countries can benefit from trade. (Hint: See Solved Problem 10.4.) A

Key Concepts

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone when a decision is made. In economic production decisions, it measures how much of one good must be sacrificed to produce more of another. This concept is fundamental in resource allocation and underpins the analysis of trade-offs in production, helping to determine efficient production and specialization choices.

Comparative Advantage

Comparative advantage refers to the ability of an entity to produce a good at a lower opportunity cost compared to others. Even if one country is less efficient overall, by focusing on the good it produces relatively more efficiently, it can benefit from specialization and exchange. This principle is central to understanding why and how trade can enhance overall economic welfare.

Production Possibility Frontier (PPF)

A production possibility frontier (PPF) is a curve that depicts the maximum feasible combinations of two goods an economy can produce given its resources and technology. The PPF illustrates the trade-offs between different goods, the concept of opportunity cost, and the efficient use of resources. It is also a useful tool for analyzing potential gains from trade when countries specialize based on their comparative advantages.

Gains from Trade

Gains from trade occur when countries or individuals specialize in producing goods where they have a comparative advantage and then trade, resulting in an overall increase in consumption possibilities. Through trade, all parties can potentially obtain more goods than they could produce on their own, thereby improving economic efficiency and welfare.

Transcript

00:01 Today we're solving problem six from chapter 10 of microeconomics.

00:05 This question gives us two countries, u .s.

00:08 And mexico, that are producing two products, food and toys, and wants us to determine the product allocation based on the number of units, the number of workers it takes to produce a unit of food, and the total number of workers that the country has.

00:21 In this case, we are given that the u .s.

00:24 Has 300 workers and needs five workers to produce a unit of food and 15 workers to produce a unit of toys.

00:30 Mexico has 100 workers and needs 12 .5 workers to produce a unit of food and 50 workers produce a unit of toys.

00:37 We are also told that the u .s.

00:40 Consumes 10 units of food and 10 units of toys while mexico consumes 4 units of food and 1 unit of toys.

00:46 The first part of this question wants to know, what is the maximum allocation that each country could produce of food or toys if it produced only one or the other? so if the u .s.

00:57 Produces only food, we know we have 300 workers and it takes five workers to produce a unit of food.

01:02 So our maximum amount of food produced for the u .s.

01:05 Is 300 divided by 5, which is 60.

01:08 And same for toys.

01:09 The maximum amount of toys that the u .s.

01:11 That can produce is 300 divided by 15, which is 20.

01:15 Now i do the exact same thing for mexico, where the maximum amount of food that mexico can produce is 100 divided by 12 .5.

01:21 And the maximum amount of toys that mexico can produce is 100 divided by 50.

01:26 The next part of this question wants to know whether the u .s.

01:29 Or mexico has a competitive advantage in producing food or toys.

01:33 In this case, the united states has a competitive advantage in producing both food and toys because it takes less workers for the u .s.

01:42 To produce food or toys than it does for mexico.

01:46 The next part of this question would like us to plot the production possibilities frontier for both the u .s.

01:51 And mexico.

01:54 So here we have separate production possibility frontier charts for both us and mexico because this is a no trade scenario.

02:01 We have food on the y -axis and toys on the x -axis.

02:04 So we know from the calculations that we just did the maximum amount of food that the us can produce is 60 and the maximum amount of toys that the us can produce is 20.

02:13 So here we have 60, and here we have 20.

02:20 So here's the us production possibilities frontier.

02:24 It's just a straight line.

02:25 And for mexico, we know that the maximum amount of food that they can produce is eight, and the maximum amount of toys that they can produce is two.

02:38 So here's the production possibilities frontier for mexico.

02:43 We also can plot the amount that they are currently consuming at the moment, and whether it's on, under, or somewhere within their production possibilities frontier...

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