International Economics

1
International Economics

• The Principle of Comparative Advantage

2
Assume Two Goods and Two Countries

• Canada with its resources can produce 50 bushels
  of wheat or 20 computers.
• US can produce 40 bushels or 80 computers.

3
WHEAT COMPUTERS
Canada 50 20 U.S. 40 80
4
Canadas Production Possibilities Curve
Wheat
50
25
0
25
50
20
Computers
5
U.S. Production Possibilities Curve
Wheat
50
40
25
75
80
0
25
50
Computers
6
Canada Uses ½ of its resources for each good
(Point A)
Wheat
50
A
25
0
25
50
20
10
Computers
7
U.S. Uses ½ of its resources for each good
(Point B)
Wheat
50
40
25
B
20
75
80
0
25
50
40
Computers
8
World Production of Wheat and Computers (No
Specialization)
Wheat Computers
Canada 25 10 U.S. 20
40 World 45 50
9
What is Canadas opportunity cost of producing a
bushel of wheat? 2/5 of a computer What is the
U.S.s opportunity cost of producing a bushel of
wheat? 2 computers Which company has a
comparative advantage in the production of
wheat? Canada
10
What is Canadas opportunity cost of producing
one computer? 5/2 bushels of wheat What is
U.S.s opportunity cost of producing one
computer? ½ bushel of wheat Which company
has a comparative advantage in the production
of computers? The U.S. Why?
11
If Canada specializes in producing wheat (Point
A)
Wheat
A
50
25
0
25
50
20
Computers
12
If the U.S. specializes in producing computers
(Point B)
Wheat
50
40
25
B
75
80
0
25
50
Computers
13
World Production of Wheat and Computers (Specializ
ation)
Wheat Computers
Canada 50 0 U.S. 0
80 World 50 80
World production of BOTH goods is higher under
specialization.
14
What are the limits on the terms of trade?
1 bushel of wheat 2/5 computers 1 bushel of
wheat 2 computers
15
Suppose the actual terms of trade between the two
goods is 1 bushel of wheat 1.25 computer. We
can then draw the consumption possibilities curve
for each country.
16
Canadas Consumption Possibilities Curve (Red
Line)
Wheat
50
25
0
25
50
20
40
Computers
17
U.S. Consumption Possibilities Curve (Red Line)
Wheat
50
40
25
75
80
0
25
50
Computers