Suppose that there are 10 million workers in Canada and that...

Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year. a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods. b. Draw Canada's production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier. c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.
a. What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods.
b. Draw Canada's production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier.
c. Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?

Key Concepts

Gains from Trade

Gains from trade occur when countries specialize in producing goods for which they have a lower opportunity cost and then engage in trade, allowing them to consume beyond their production possibility frontiers. This concept underlines the benefits of comparative advantage, as trade expands the range of consumption possibilities and potentially increases overall economic welfare.

Terms of Trade

Terms of trade refer to the ratio at which one good is exchanged for another in international trade. It represents the rate at which exports can be exchanged for imports and is crucial in determining the potential benefits countries can garner from specialization and trading based on their comparative advantages.

Production Possibility Frontier

The Production Possibility Frontier (PPF) is a curve that illustrates the maximum possible output combinations of two goods that an economy can produce given its resources and technology, assuming full and efficient utilization. It highlights the trade-offs and opportunity costs involved in production decisions and demonstrates the concept of scarcity, efficiency, and the limits of productive capacity.

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone when a decision is made to allocate resources to a specific productive use. It represents the trade-off between two goods or services, meaning that producing more of one good inevitably means sacrificing the production of another. This concept is fundamental in analyzing production decisions and understanding the cost of diverting resources from one alternative to another.

Transcript

00:01 Here we're going to continue working with the idea of tradeoffs and production possibility frontiers.

00:06 In this case, we are given an example where canada has 10 million workers, each of whom can produce either two cars or 30 bushels of wheat in one year.

00:15 To start, let's determine the opportunity costs here.

00:18 So to do that, what we need to do is determine what it costs to produce one car and what it costs to produce one bushel of wheat.

00:25 So in this case, we have the ratio of two cars per 30 bushels of.

00:30 Of wheat.

00:31 So to get that to one car, it looks like we can divide.

00:34 We can just cut them both in half because that would be we have right two cars per 30 bushels of wheat.

00:41 Simplify that to get one car per 15 bushels of wheat it looks like.

00:47 So the opportunity cost of one car is 15 bushels of wheat.

00:51 Now for one bushel of wheat we have the ratio of 30 bushels of wheat per two cars.

00:58 So to simplify that, we end up getting that we have one bushel of wheat per 0 .07 cars.

01:08 And that would be our opportunity cost of producing one bushel of wheat.

01:13 Now we want to go ahead and draw our production possibility frontier.

01:17 So to do this, we need to determine what our maximum points are going to be.

01:21 So at the point where we're producing as much wheat as possible, that means that we're producing zero cars.

01:26 So our 10 million workers, right, they can each produce.

01:30 Produce 30 bushels of wheat.

01:34 And that means that they're not producing any cars.

01:36 So that gives us a total of 300 million bushels of wheat.

01:41 So that would be our y intercept up here at 300.

01:46 And now for our x intercept, these same 10 million workers, if they're not producing any wheat, they can each produce two cars.

01:54 So that tells us that they could produce 20 million cars total.

01:58 So that gives us the x intercept down here at 20 million cars.

02:04 So let's go ahead and connect these dots and that'll give us the curve that we're working with.

02:09 In this case, it's linear.

02:12 Now, let's say that canada is consuming 10 million cars.

02:17 So let's put that down here.

02:18 Say they're consuming 10 million cars.

02:20 How much wheat are they then able to consume? so all we need to do is determine where the point is on this curve right here...

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