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MENU OF TOPICS

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COMPARATIVE ADVANTAGE

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POST TRADE PRICES

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Click on one of the following topics

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INTERNATIONAL

TRADE

COMPARATIVE

ADVANTAGE

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THE TERMS OF TRADE

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Key Concepts: Comparative vs. Absolute Advantage, Terms of Trade,

Principle of Comparative Advantage.

Read the notes on the left of this screen, then click on the Figure 1 link below.

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In this tutorial we examine how international trade can result in both gains and losses to our economy.

COMPARATIVE ADVANTAGE

We begin by studying the principle of comparative advantage in Figure 1, which illustrates, at the global level, how specialization can increase total world production.

According to this principle, if nations specialize and export those products in which they have the comparative advantage (can produce at a lower opportunity cost), this will result in a more efficient allocation of world resources and total world production will increase. Figure 1 illustrates this principle using a simplified situation where the world consists of two nations and each nation can produce only two goods.

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Exports

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Foreign

Nations

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Canadian

Firms

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Canadian

Households

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Imports

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Imports

2 @@ ?Pȿ3 43(@4 4+YdX ;5o-0(Click here to view Figure 2 5U6z`+%UAy#G 8[%ay#G 8[%ly#G 8[ 6 &)(X=Key Concepts: Terms of Trade, Limits of the Terms of Trade, Trade Possibility Curve

Read the notes on the left of this screen, then click on the Figure 2 link below.

7 l  I8w\x2333(

Application Question 1

Ann and Don work in the same law

firm. In one hour Ann can provide 4 legal

opinions or type 2 real estate contracts,

while Don can only provide 2 legal

opinions or type 2 real estate contracts.

Even though Ann is better than or as

good as Don, in both tasks, can the firm

gain from specialization and trade?

8~@ 9o2333(

Click here for the solution.

9( L:w2 (

After you have completed all the slides and figures in this tutorial re-visit this page

and see if you can answer Application Question 1 below.

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THE TERMS OF TRADE

In Figure 1, we saw how total world production can be increased if nations specialize according to comparative advantage.

In Figure 2, we examine the terms of trade principle, which explains the conditions necessary to ensure, at the national level, that all trading nations share the increased world production resulting from specialization.

The terms of trade refers to the real rate at which nations trade one product for another. The terms of trade principle states that both countries can share in the gain in total world output as long as the terms of trade for a product is somewhere between each nation's opportunity cost of producing that product. Figure 2 illustrates this principle using a simplified two country, two product example.

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Key Concepts: Export Price Principle, Import Price Principle

Read the notes on the left of this screen, then click on the Figure 3 link below.

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Application Question 2

Currently, the U.S. government is

imposing taxes (tariffs) on finished

Canadian lumber being exported

to the U.S. Use the "post trade

price principles" to identify a major

U.S. lobby group who would be

against the U.S. tariffs on Canadian

lumber.

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Click here for the solution.

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After you have completed all the slides and figures in this tutorial re-visit this page

and see if you can answer Application Question 2 below.

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POST TRADE INDUSTRY PRICES

Figure 3 introduces an export price principle and an import price principle, each of which explains how, at the industry level, trade can result in both "gainers" and "losers."

According to the export price principle, after trade, the price of a product that Canada exports will increase. As a result, Canadian firms supplying the export product will benefit and Canadian buyers of the export product will lose.

According to the import price principle, after trade, the price of a product that Canada imports will decrease. As a result, Canadian firms supplying the import product will lose and Canadian buyers of the import product will benefit.

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Congratulations! You have completed this concept tutorial!!

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INTERNATIONAL TRADE: COMPARATIVE ADVANTAGE

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Solution to Application Question 1

Before specialization: In an 8 hour day Ann

and Don spend 4 hours in each task. Their

total production equals (4x4 ) + (4x2) = 24 legal

opinions and (4x2) + (4x2) = 16 contracts.

Since, in each hour, Ann can produce a legal

opinion at a lower opportunity cost than Don,

(.5 contracts vs 1 contract) Ann has the

comparative advantage in legal opinions. This

implies that Don has the comparative

advantage in typing real estate contracts.

After specialization: Based on comparative

advantage, Ann will spend 8 hours specializing

in legal opinions and produce (8x4) = 32 legal

opinions in one day. Don will spend 8 hours on

typing contracts and will produce (8x2) = 16

contracts. Their total production in the firm is

32 legal opinions and 16 contracts.

Specialization according to comparative

advantage increased total firm production by

8 legal opinions per day!

M Nw 2 (

Click here to return to the previous slide.

N X= IOw\x2333(

Application Question 1

Ann and Don work in the same law

firm. In one hour Ann can provide 4 legal

opinions or type 2 real estate contracts,

while Don can only provide 2 legal

opinions or type 2 real estate contracts.

Even though Ann is better than or as

good as Don, in both tasks, can the firm

gain from specialization and trade?

O~@@#PxAxTA%xY^ PQ QQGCO'l Rw oP2 (

Solution to Application Question 2

According to the Import Price Principle, if the tariffs were eliminated and free trade were to take place, the price of lumber in the U.S. would decline - lumber being an import in the U.S. This would in turn make it cheaper for U.S. homebuilders to construct new U.S homes. Therefore, it is in the interests of all U.S. homebuilders to lobby against the U.S. tariffs on Canadian lumber.

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Click here to return to the previous slide.

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Application Question 2

Currently the U.S. government is

imposing taxes (tariffs) on finished

Canadian lumber being exported

to the U.S. Use the "post trade

price principles" to identify a major

U.S. lobby group who would be

against the U.S. tariffs on Canadian

lumber.

T~@ Uo2333(

Click here for the solution.

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Click here to exit Figure 1

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Figure 1a: Principle of Comparative Advantage: Numeric Illustration

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1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

In illustrating this principle we make the simplified assumption that there are only two countries in the world -

Canada and Australia. We also assume that Canada and Australia can only produce two goods - wheat and wool.

Given the same amount of resources, each country can produce the different combinations of wheat and wool as

described in the production possibilities in Table A. Click here to view Table A.

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Click here to exit Figure 1

Z 'PůFigure 1a: Principle of Comparative Advantage: Numeric Illustration

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Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

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Combination

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Canada

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Wool

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Canada's Production Possibilities

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Australia's Production Possibilities

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1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

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Explanation of Production Possibilities Table:

Canada: Combination D: If Canada only produces wool (and no wheat) she will be able to produce 30 tons

of wool per year based on her current level of resources and current technology. Click here to continue.

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Figure 1a: Principle of Comparative Advantage: Numeric Illustration

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Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

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Combination

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Wool

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Australia

Wheat

Wool

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Canada's Production Possibilities

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Australia's Production Possibilities

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1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

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Explanation of Production Possibilities Table:

Canada: Combination E: If Canada takes some resources out of wool production and into wheat production she

will be able to produce 10 tons of wheat and 20 tons of wool per year based on current resources and technology.

What is the opportunity cost or sacrifice involved in producing an extra ton of wheat in this production range?

Answer: In producing an extra 10 tons of wheat, 10 tons of wool are sacrificed (10 = 30 - 20). Hence, in producing one extra ton of wheat the sacrifice or opportunity cost would be 1 ton of wool. Click here to continue.

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Figure 1a: Principle of Comparative Advantage: Numeric Illustration

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Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

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Combination

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Canada

Wheat

Wool

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D

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0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" mW_ 2 (

F

q _Raƀ2 (

(Tons)

18

12

 fWs{ `2(

G

 qg) `2(

Combination

  _ta2(

Australia

Wheat

Wool

 fWl{ `2(

D

 fWf{ `2(

E

t fW_ `2(

F

t fWs{ `2(

G

\t oq2 (

Canada's Production Possibilities

 Sz w/ `2 (

Australia's Production Possibilities

!ʼn UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

"` >l2 (

Explanation of Production Possibilities Table:

Canada: Combination F: If Canada takes more resources out of wool production and into wheat production she

will be able to produce 18 tons of wheat and 12 tons of wool per year based on current resources and technology.

What is the opportunity cost or sacrifice involved in producing an extra ton of wheat in this production range?

Answer: In producing an extra 8 tons of wheat, 8 tons of wool are sacrificed (8 = 20 - 12). Hence, in producing one extra ton of wheat the sacrifice or opportunity cost would be 1 ton of wool. Click here to continue.

#$B@ !"#PDQЍMrP*, w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _l?a2 (

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 mWs{ 2 (

G

 _Ra2 (

(Tons)

30

0

b qg) `2(

Combination

  _ta2(

Australia

Wheat

Wool

 fWl{ `2(

D

 fWf{ `2(

E

t fW_ `2(

F

t fWs{ `2(

G

 \t oq2 (

Canada's Production Possibilities

!Sz w/ `2 (

Australia's Production Possibilities

"ʼn UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

#` >2 (

Explanation of Production Possibilities Table:

Canada: Combination G: If Canada takes all resources out of wool production and into wheat production she

will be able to produce 30 tons of wheat and 0 tons of wool per year based on current resources and technology.

What is the opportunity cost or sacrifice involved in producing an extra ton of wheat in this production range?

Answer: In producing an extra 12 tons of wheat, 12 tons of wool are sacrificed (12 = 12 - 0). Hence, in producing one extra ton of wheat the sacrifice or opportunity cost would be 1 ton of wool. Note that, regardless of the production range, the opportunity cost for one ton of wheat is assumed to be constant at 1 ton of wool.

Click here to continue.

$$B@ !"#$PL]4MrPh. w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _ia2(

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 mWl{ 2 (

D

 _Raƀ2 (

(Tons)

0

20

J fWf{ `2(

E

t fW_ `2(

F

 t fWs{ `2(

G

!\t oq2 (

Canada's Production Possibilities

"Sz w/ `2 (

Australia's Production Possibilities

#ʼn UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

$` 퀭2 (

Explanation of Production Possibilities Table:

Australia: Combination D: If Australia only produces wool (and no wheat) she will be able to produce 20 tons

of wool per year based on her current level of resources and current technology. Click here to continue.

%$B@ !"#$%Pn@PMrPdl w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _ia2(

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 fWl{ `2(

D

 _Pa2(

(Tons)

0

20

J mWf{ 2 (

E

t _Raƀ2 (

(Tons)

4

12

 0 fW_ `2(

F

!t fWs{ `2(

G

"\t oq2 (

Canada's Production Possibilities

#Sz w/ `2 (

Australia's Production Possibilities

$ʼn UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

%` >l2 (

Explanation of Production Possibilities Table:

Australia: Combination E: If Australia takes some resources out of wool production and into wheat production she

will be able to produce 4 tons of wheat and 12 tons of wool per year based on current resources and technology.

What is the opportunity cost or sacrifice involved in producing an extra ton of wheat in this production range?

Answer: In producing an extra 4 tons of wheat, 8 tons of wool are sacrificed (8 = 20 - 12). Hence, in producing one extra ton of wheat the sacrifice or opportunity cost would be 2 tons of wool. Click here to continue.

&$B@ !"#$%&PL:T$MrPdl w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _ia2(

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 fWl{ `2(

D

 _Pa2(

(Tons)

0

20

J fWf{ `2(

E

t _Pa2(

(Tons)

4

12

 0 mW_ 2 (

F

!t _Raƀ2 (

(Tons)

8

4

"Ā0 fWs{ `2(

G

#\t oq2 (

Canada's Production Possibilities

$Sz w/ `2 (

Australia's Production Possibilities

%ʼn UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

&` >l2 (

Explanation of Production Possibilities Table:

Australia: Combination F: If Australia takes more resources out of wool production and into wheat production she

will be able to produce 8 tons of wheat and 4 tons of wool per year based on current resources and technology.

What is the opportunity cost or sacrifice involved in producing an extra ton of wheat in this production range?

Answer: In producing an extra 4 tons of wheat, 8 tons of wool are sacrificed (8 = 12 -4). Hence, in producing one extra ton of wheat the sacrifice or opportunity cost would be 2 tons of wool. Click here to continue.

'$B@ !"#$%&'PDrPMrP*, w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _ia2(

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 fWl{ `2(

D

 _Pa2(

(Tons)

0

20

J fWf{ `2(

E

t _Pa2(

(Tons)

4

12

 0 fW_ `2(

F

!t  _Pa2(

(Tons)

8

4

" Ā0 m Ws{ 2 (

G

# \t  _Raƀ2 (

(Tons)

10

0

$ 0 oq2 (

Canada's Production Possibilities

% Sz w/ `2 (

Australia's Production Possibilities

& ʼn UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

'` >2 (

Explanation of Production Possibilities Table:

Australia: Combination G: If Australia takes all resources out of wool production and into wheat production she

will be able to produce 10 tons of wheat and 0 tons of wool per year based on current resources and technology.

What is the opportunity cost or sacrifice involved in producing an extra ton of wheat in this production range?

Answer: In producing an extra 2 tons of wheat, 4 tons of wool are sacrificed (4 = 4 - 0). Hence, in producing one extra ton of wheat the sacrifice or opportunity cost would be 2 tons of wool. Note that, regardless of the production range, the opportunity cost for one ton of wheat is assumed to be constant at 2 tons of wool.

Click here to continue.

($B@ !"#$%&'(PCTčMrP^.,xDj!Zܮ䏄\6-M^ w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _l?a2 (

Canada

Wheat

Wool

'b mWl{ 2 (

D

L _Pa2(

(Tons)

0

30

R mWf{ 2 (

E

L _Pa2(

(Tons)

10

20

l" mW_ 2 (

F

q _Raƀ2 (

(Tons)

18

12

 mWs{ 2 (

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 mWl{ 2 (

D

  _Pa2(

(Tons)

0

20

 J m!Wf{ 2 (

E

!t "_Pa2(

(Tons)

4

12

 "0 m#W_ 2 (

F

!#t $_Raƀ2 (

(Tons)

8

4

"$Ā0 m%Ws{ 2 (

G

#%\t &_Pa2(

(Tons)

10

0

$&0 'oq2 (

Canada's Production Possibilities

%'Sz (w/ `2 (

Australia's Production Possibilities

&(ʼn )UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

')` *j-2 (

Final Assumption: Each nation initially self sufficient at combination F- not specializing nor trading.

We also assume, initially, that each nation is not specializing or trading.Canada is initially at production possibility

combination F, producing 18 tons wheat and 12 tons wool per year. Australia is initially at its production possibility combination F, producing 8 tons of wheat and 4 tons of wool per year. Click here to continue.

(* @ !"#$%&'(PDatЍMrP+[ +w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

+f@ ` ,X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

,Fv q-g) `2(

Combination

-LGL ._l?a2 (

Canada

Wheat

Wool

.'b m/Wl{ 2 (

D

/L 0_Pa2(

(Tons)

0

30

0R m1Wf{ 2 (

E

1L 2_Pa2(

(Tons)

10

20

2l" m3W_ 2 (

F

3q 4_Pa2(

(Tons)

18

12

4 m5Ws{ 2 (

G

5 6_Pa2(

(Tons)

30

0

6b q7g) `2(

Combination

7  8_?a2 (

Australia

Wheat

Wool

8 m9Wl{ 2 (

D

9 :_Pa2(

(Tons)

0

20

:J m;Wf{ 2 (

E

;t <_Pa2(

(Tons)

4

12

 <0 m=W_ 2 (

F

!=t >_Pa2(

(Tons)

8

4

">Ā0 m?Ws{ 2 (

G

#?\t @_Pa2(

(Tons)

10

0

$@0 Aoq2 (

Canada's Production Possibilities

%ASz Bw/ `2 (

Australia's Production Possibilities

&Bʼn CUЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

'C` DD$̀2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: A country has the comparative advantage in a product if it can produce this product at a lower opportunity cost than other countries. Therefore, to answer this we suggest building an opportunity cost table showing the extra cost (opportunity cost) of producing one unit of each product in each country: This opportunity cost table, Table B, can be easily constructed based on the production possibilities table above, Table A.

Click here to continue.

(D$B@ !"#$%&'(MrPjExDS}6)o 4T%B) KSVC*j!d Z0SJvt+/,T\ObiAj{C%} zP*Ma Cʄ\*CڄmW}Y*ܯ–t< sTy]a.ZBWY.Y6:'LAt4T{WYЧ E Fw `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

Ff@ ` GX2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

GFv qHg) `2(

Combination

HLGL I_l?a2 (

Canada

Wheat

Wool

I'b mJWl{ 2 (

D

JL K_Raƀ2 (

(Tons)

0

30

KR mLWf{ 2 (

E

LL M_Raƀ2 (

(Tons)

10

20

Ml" fNW_ `2(

F

Nq O_Pa2(

(Tons)

18

12

O fPWs{ `2(

G

P Q_Pa2(

(Tons)

30

0

Qb qRg) `2(

Combination

R  S_ta2(

Australia

Wheat

Wool

S fTWl{ `2(

D

T U_Pa2(

(Tons)

0

20

UJ fVWf{ `2(

E

Vt W_Pa2(

(Tons)

4

12

 W0 fXW_ `2(

F

!Xt Y_Pa2(

(Tons)

8

4

"YĀ0 fZWs{ `2(

G

#Z\t [_Pa2(

(Tons)

10

0

$[0 \oq2 (

Canada's Production Possibilities

%\Sz ]w/ `2 (

Australia's Production Possibilities

&]ʼn ^UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

Each nation initially self sufficient at combination F- not specializing nor trading.

'^` _/2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: To start, we find the opportunity cost (OC) of producing one ton of wheat in Canada. Since we assume a constant cost situation we can compare any two production

possibilty combinations, such as combinations D and E, for Canada to find the opportunity cost.

(_$B m`_i_`2(

Country

)`+#t sa_l?`2 (

Canada

*a+#@ vbg4 `2(

1 ton wool costs

+bt ~cg< 2 (

1 ton wheat costs

,cSt od_t`2(

Australia

-d+# eo2 (

Table B: Opportunity Cost Table

.e&#; ,fw & 2(

In going from combination D to E in Table A above:

10 extra wheat tons costs 10 extra wool tons so:

1 extra wheat ton costs X extra wool tons where

X = OC = 1 wool ton. Click here to continue.

/fco` ygg G 2 (

OC = _____?

0ga@@ !"#$%&'()*+,-./0MrPk< hw `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

hf@ ` iX2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

iFv qjg) `2(

Combination

jLGL k_l?a2 (

Canada

Wheat

Wool

k'b mlWl{ 2 (

D

lL m_Raƀ2 (

(Tons)

0

30

mR mnWf{ 2 (

E

nL o_Raƀ2 (

(Tons)

10

20

ol" fpW_ `2(

F

pq q_Pa2(

(Tons)

18

12

q frWs{ `2(

G

r s_Pa2(

(Tons)

30

0

sb qtg) `2(

Combination

t  u_ta2(

Australia

Wheat

Wool

u fvWl{ `2(

D

v w_Pa2(

(Tons)

0

20

wJ fxWf{ `2(

E

xt y_Pa2(

(Tons)

4

12

 y0 fzW_ `2(

F

!zt {_Pa2(

(Tons)

8

4

"{Ā0 f|Ws{ `2(

G

#|\t }_Pa2(

(Tons)

10

0

$}0 ~oq2 (

Canada's Production Possibilities

%~Sz w/ `2 (

Australia's Production Possibilities

&ʼn _/2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: Next, we find the opportunity cost (OC) of producing one ton of wool in Canada. This will be the reciprocal of the opportunity cost of the one ton of wheat - the value that we just found. That is the opportunity cost of one ton of wool = 1/1 = 1 ton of wheat.

'$B t_r_`2 (

Country

(+#t s_l?`2 (

Canada

)+#@ vg( `2(

OC = 1 ton wool

*a@ }g8 2 (

1 ton wool costs

+t wg8w `2(

1 ton wheat costs

,St o_t`2(

Australia

-+# o2 (

Table B: Opportunity Cost Table

.&#; w 2(

In finding the opportunity cost of 1 ton of wool we take the

reciprocal of the opportunity cost of one ton of wheat or we

take 1/1 = 1 ton of wheat. Click here to continue.

/co` yg G 2 (

OC = _____?

0@ UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

1`@ !"#$%&'()*+,-./01MrPjxDFigure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _ia2(

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 mWl{ 2 (

D

 _Raƀ2 (

(Tons)

0

20

J mWf{ 2 (

E

t _Raƀ2 (

(Tons)

4

12

 0 mW_ 2 (

F

!t _Pa2(

(Tons)

8

4

"Ā0 mWs{ 2 (

G

#\t _Raƀ2 (

(Tons)

10

0

$0 oq2 (

Canada's Production Possibilities

%Sz w/ `2 (

Australia's Production Possibilities

&ʼn /逭2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: Next, we find the opportunity cost (OC) of producing one ton of wheat in Australia. We can find this by comparing combination D and E in Australia.

'$B t_r_`2 (

Country

(+#t l_i`2(

Canada

)+#@ vg( `2(

OC = 1 ton wool

*a@ vg4 `2(

1 ton wool costs

+t wg8w `2(

1 ton wheat costs

,St v_?`2 (

Australia

-+# o2 (

Table B: Opportunity Cost Table

.&#; yg2 `2(

OC = 1 ton of wheat

/@ yg G 2 (

OC = _____?

0a@ -w & 2(

In going from combination D to E in Table A above:

4 extra wheat tons costs 8 extra wool tons so:

1 extra wheat ton costs X extra wool tons where

X = OC = 2 wool tons. Click here to continue.

1co` UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

2`@ !"#$%&'()*+,-./012MrPn w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv h/2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: Next, we find the opportunity cost (OC) of producing one ton of wool in Australia. We can find this by taking the reciprocal of the opportunity cost of wheat in Australia or

taking 1/2 = 0.5 tons wheat..

$B t_r_`2 (

Country

+#t l_i`2(

Canada

+#@ vg( `2(

OC = 1 ton wool

a@ vg4 `2(

1 ton wool costs

t wg8w `2(

1 ton wheat costs

St v_?`2 (

Australia

+#@ o2 (

Table B: Opportunity Cost Table

&#; yg2 `2(

OC = 1 ton of wheat

@ wg, `2(

OC = 2 tons wool

a@ yg G 2 (

OC = _____?

@ w 2(

In finding the opportunity cost of 1 ton of wool we take the

reciprocal of the opportunity cost of one ton of wheat or we

take 1/2 =0.50 tons of wheat. Click here to continue.

co` UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

` qg) `2(

Combination

LGL _ia2(

Canada

Wheat

Wool

'b fWl{ `2(

D

 L _Pa2(

(Tons)

0

30

!R fWf{ `2(

E

"L _Pa2(

(Tons)

10

20

#l" fW_ `2(

F

$q _Pa2(

(Tons)

18

12

% fWs{ `2(

G

& _Pa2(

(Tons)

30

0

'b qg) `2(

Combination

(  _?a2 (

Australia

Wheat

Wool

) mWl{ 2 (

D

* _Raƀ2 (

(Tons)

0

20

+J mWf{ 2 (

E

,t _Raƀ2 (

(Tons)

4

12

-0 mW_ 2 (

F

.t _Pa2(

(Tons)

8

4

/Ā0 mWs{ 2 (

G

0\t _Raƀ2 (

(Tons)

10

0

10 oq2 (

Canada's Production Possibilities

2Sz w/ `2 (

Australia's Production Possibilities

3ʼn@ !"#$%&'()*+,-./0123MrPgޱDxDFigure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _l?a2 (

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

  _?a2 (

Australia

Wheat

Wool

 fWl{ `2(

D

 _Pa2(

(Tons)

0

20

J fWf{ `2(

E

 t _Pa2(

(Tons)

4

12

!0 fW_ `2(

F

"t _Pa2(

(Tons)

8

4

#Ā0 fWs{ `2(

G

$\t _Pa2(

(Tons)

10

0

%0 oq2 (

Canada's Production Possibilities

&Sz w/ `2 (

Australia's Production Possibilities

'ʼn /2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Once the opportunity cost table is completed we can easily pick out which country has the

comparative advantage in each product. Consider the column in Table B entitled "1 ton wheat costs": You can see that an extra 1 ton of wheat costs less to produce in Canada (1 ton wool vs. 2 tons wool) than in Australia.

($B m_i_`2(

Country

)+#t s_l?`2 (

Canada

*+#@ vg( `2(

OC = 1 ton wool

+a@ vg4 `2(

1 ton wool costs

,t wg8w `2(

1 ton wheat costs

-St o_t`2(

Australia

.+#@ o2 (

Table B: Opportunity Cost Table

/&#; yg2 `2(

OC = 1 ton of wheat

0@ wg, `2(

OC = 2 tons wool

1a@ zg67 `2(

OC = .50 tons wheat

2;@ w )2 (

Canada has the comparative advantage (lower

opportunity cost) in the production of wheat. Thus,

Canada should specialize and export wheat, should

trade take place. Click here to continue.

3ރo` UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

4`@ !"#$%&'()*+,-./01234MrPh|VxDćh w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

f@ ` X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

Fv qg) `2(

Combination

LGL _l?a2 (

Canada

Wheat

Wool

'b fWl{ `2(

D

L _Pa2(

(Tons)

0

30

R fWf{ `2(

E

L _Pa2(

(Tons)

10

20

l" fW_ `2(

F

q _Pa2(

(Tons)

18

12

 fWs{ `2(

G

 _Pa2(

(Tons)

30

0

b qg) `2(

Combination

   _?a2 (

Australia

Wheat

Wool

  f Wl{ `2(

D

   _Pa2(

(Tons)

0

20

 J f Wf{ `2(

E

 t  _Pa2(

(Tons)

4

12

! 0 fW_ `2(

F

"t _Pa2(

(Tons)

8

4

#Ā0 fWs{ `2(

G

$\t _Pa2(

(Tons)

10

0

%0 oq2 (

Canada's Production Possibilities

&Sz w/ `2 (

Australia's Production Possibilities

'ʼn /逭2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Consider the column in Table B entitled "1 ton wool costs": You can see that an extra 1 ton of wool costs less to produce in Australia (.5 tons wheat vs. 1 ton wheat) than in Canada.

($B m_i_`2(

Country

)+#t l_i`2(

Canada

*+#@ vg( `2(

OC = 1 ton wool

+a@ vg4 `2(

1 ton wool costs

,t wg8w `2(

1 ton wheat costs

-St v_?`2 (

Australia

.+#@ o2 (

Table B: Opportunity Cost Table

/&#; yg2 `2(

OC = 1 ton of wheat

0@ wg, `2(

OC = 2 tons wool

1a@ zg67 `2(

OC = .50 tons wheat

2;@ w )2 (

Australia has the comparative advantage (lower

opportunity cost) in the production of wool. Thus,

Australia should specialize and export wool, should

trade take place. Click here to continue.

3ރo`  UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

4 `@ !"#$%&'()*+,-./01234MrPSf!xDFigure 1a: Principle of Comparative Advantage: Numeric Illustration

"f@ ` #X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

#Fv b$Z2 (

Problem 2: If each nation specializes in its area of comparative advantage, what will happen to world production?

Before specialization: Each nation is at production possibility combination F, where total world production is:

18 + 8 = 26 tons wheat and 12 + 4 = 16 tons wool. Click here to continue.

$$B %UЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

%` q&g) `2(

Combination

&LGL '_l?a2 (

Canada

Wheat

Wool

''b f(Wl{ `2(

D

(L )_Pa2(

(Tons)

0

30

)R f*Wf{ `2(

E

*L +_Pa2(

(Tons)

10

20

+l" m,W_ 2 (

F

,q -_Raƀ2 (

(Tons)

18

12

- f.Ws{ `2(

G

. /_Pa2(

(Tons)

30

0

/b q0g) `2(

Combination

0  1_?a2 (

Australia

Wheat

Wool

1 m2Wl{ 2 (

D

2 3_Pa2(

(Tons)

0

20

 3J m4Wf{ 2 (

E

!4t 5_Pa2(

(Tons)

4

12

"50 m6W_ 2 (

F

#6t 7_Raƀ2 (

(Tons)

8

4

$7Ā0 m8Ws{ 2 (

G

%8\t 9_Pa2(

(Tons)

10

0

&90 :oq2 (

Canada's Production Possibilities

':Sz ;w/ `2 (

Australia's Production Possibilities

(;ʼn@ !"#$%&'(MrP+@<xDBWY.M4ז*vX6.M4E t>|ڄ7C^< =w `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

=f@ ` >X2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

>Fv q?g) `2(

Combination

?LGL @_l?a2 (

Canada

Wheat

Wool

@'b fAWl{ `2(

D

AL B_Pa2(

(Tons)

0

30

BR fCWf{ `2(

E

CL D_Pa2(

(Tons)

10

20

Dl" fEW_ `2(

F

Eq F_Pa2(

(Tons)

18

12

F mGWs{ 2 (

G

G H_Raƀ2 (

(Tons)

30

0

Hb qIg) `2(

Combination

I  J_?a2 (

Australia

Wheat

Wool

J mKWl{ 2 (

D

K L_Raƀ2 (

(Tons)

0

20

LJ fMWf{ `2(

E

Mt N_Pa2(

(Tons)

4

12

 N0 fOW_ `2(

F

!Ot P_Pa2(

(Tons)

8

4

"PĀ0 fQWs{ `2(

G

#Q\t R_Pa2(

(Tons)

10

0

$R0 Soq2 (

Canada's Production Possibilities

%SSz Tw/ `2 (

Australia's Production Possibilities

&Tʼn UZ2 (

Problem 2: If each nation specializes in its area of comparative advantage, what will happen to world production?

Before specialization: Each nation is at production possibility combination F, where total world production is:

18 + 8 = 26 tons wheat and 12 + 4 = 16 tons wool.

After specialization: If Canada specializes in wheat (where it has the comparative advantage) it will switch its resources to production combination G and produce 30 tons wheat and 0 tons of wool. If Australia specializes in wool (where it has the comparative advantage) it will switch its resources to production combination D and produce 20 tons wool and 0 tons of wheat. Thus, after specialization total world production will be 30 tons wheat and 20 tons wool.

Click here to continue.

'U$B VUЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

(V`@ !"#$%&'(MrP@Я< Ww `2 (

Figure 1a: Principle of Comparative Advantage: Numeric Illustration

Wf@ ` XX2 (

Table A: Annual Production Possibilities Based on Each Nation's Resources and Technology

XFv qYg) `2(

Combination

YLGL Z_l?a2 (

Canada

Wheat

Wool

Z'b f[Wl{ `2(

D

[L \_Pa2(

(Tons)

0

30

\R f]Wf{ `2(

E

]L ^_Pa2(

(Tons)

10

20

^l" f_W_ `2(

F

_q `_Pa2(

(Tons)

18

12

` maWs{ 2 (

G

a b_Raƀ2 (

(Tons)

30

0

bb qcg) `2(

Combination

c  d_?a2 (

Australia

Wheat

Wool

d meWl{ 2 (

D

e f_Raƀ2 (

(Tons)

0

20

fJ fgWf{ `2(

E

gt h_Pa2(

(Tons)

4

12

 h0 fiW_ `2(

F

!it j_Pa2(

(Tons)

8

4

"jĀ0 fkWs{ `2(

G

#k\t l_Pa2(

(Tons)

10

0

$l0 moq2 (

Canada's Production Possibilities

%mSz nw/ `2 (

Australia's Production Possibilities

&nʼn oZ_2 (

Problem 2: If each nation specializes in its area of comparative advantage, what will happen to world production?

Before specialization: Each nation is at production possibility combination F, where total world production is:

18 + 8 = 26 tons wheat and 12 + 4 = 16 tons wool.

After specialization: If Canada specializes in wheat (where it has the comparative advantage) it will switch its resources to production combination G and produce 30 tons wheat and 0 tons of wool. If Australia specializes in wool (where it has the comparative advantage) it will switch its resources to production combination D and produce 20 tons wool and 0 tons of wheat. Thus, after specialization total world production will be 30 tons wheat and 20 tons wool.

Increased World Production: As a result of specialization based on comparative advantage, total world production of wheat increases from 26 to 30 tons or by 4 tons a year. Also, total world wool production will increase from 16 tons to 20 tons or by 4 tons a year. Click here to continue.

'o$B pUЀ2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost

Each nation initially self sufficient at combination F- not specializing nor trading.

(p`@ !"#$%&'(1{D1yZqx7cx333%LcZW)gc/8m@\FSA0\F=7b 5P\":q rF2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

rf@ ` qsg) `2(

Combination

s> t_l?a2 (

Canada

Wheat

Wool

t % muWl{ 2 (

D

uW v_Raƀ2 (

(Tons)

0

30

vK&@ fwWf{ `2(

E

w x_Pa2(

(Tons)

10

20

xeB&@ fyW_ `2(

F

y z_Pa2(

(Tons)

18

12

z~&@ f{Ws{ `2(

G

{ |_Pa2(

(Tons)

30

0

|&@ }w 8 `2 (

Table A: Canada's Production Possibilities Table

}4 /~w MFȭ2 (

Canada's Production Possibilities (PP) Curve:

Based on Table A, above, we can construct the

Production Possibilities Curve for Canada for the 2 goods, wheat and wool, as follows. Click on the letter D in Table A above to display this point on the PP Curve.

~b  U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Australia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` i 02 (

wheat in

tons

H a:2 (

wool in

tons

 @1{D=пx7c333LҧҪtNS(8geR 6|agׂfɄ:r+ǥ괩ч%} –v2j;y4jS}6).#U ފ(n F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` a:2 (

wool in

tons

  i 02 (

wheat in

tons

H pb1 2 (

D

  U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` qg) `2(

Combination

> _l?a2 (

Canada

Wheat

Wool

 % mWl{ 2 (

D

W _Raƀ2 (

(Tons)

0

30

K&@ fWf{ `2(

E

 _Pa2(

(Tons)

10

20

eB&@ fW_ `2(

F

 _Pa2(

(Tons)

18

12

~&@ fWs{ `2(

G

 _Pa2(

(Tons)

30

0

&@ w 8 `2 (

Table A: Canada's Production Possibilities Table

4 Ww M(2 (

Canada's Production Possibilities (PP) Curve:

Click on the letter E in Table A above to display this point on the PP Curve.

b  jbz2g `2(

30

 @ 1{DKJx7c333( s j5_B𥝌qf^rMq0meZ#5`Fvy5+UFvy<ZϩF @`ͤ4ggӳ}J0`K9g3h k>0mFm 0/@j[Z3i14xR6sFvy< F QH.t46s;>F֣ցj3iæcg3h j=h66\Zi6s;>gQf MK9N#GkQ@`FTԳ6yj=h66=s;>F-GfcSRggӳz10mFm 0/@]#>FֳQfcg3zRћHhϧg5` @#@ lv};<gԣ ^D6s;>FֳQfc269N#GkY(hQ2]ϧg5`F,v};<gԣ ͤ4 LFm 6s;>FֳQ/@ik9N#GkY(j3i1zSWћHhϧg5` +0ϧg5`F^D6s;>FֳQfc69N#GkY(hQ8ϧg5`F(ͤ4ggӳ}J0` F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` i 02 (

wheat in

tons

H jbz2g `2(

30

 jbz2g `2(

10

+ ib1 `2(

D

  pb 2 (

E

D  jbz2g `2(

20

Z U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` a:2 (

wool in

tons

  qg) `2(

Combination

> _l?a2 (

Canada

Wheat

Wool

 % fWl{ `2(

D

W _Pa2(

(Tons)

0

30

K&@ mWf{ 2 (

E

 _Raƀ2 (

(Tons)

10

20

eB&@ fW_ `2(

F

 _Pa2(

(Tons)

18

12

~&@ fWs{ `2(

G

  _Pa2(

(Tons)

30

0

!&@ w 8 `2 (

Table A: Canada's Production Possibilities Table

"4 w MZ2 (

Canada's Production Possibilities (PP) Curve:

Note that in going from combination D to E, 10 tons of wool is sacrificed in order to produce an extra 10 tons of wheat. The opportunity cost of one ton of wheat equals one ton of wool. This opportunity cost equals the slope of the line segment DE.

Click on the letter F in Table A above to display this point on the PP Curve.

#b Asiѡp`%$L7( @%t()W{g'sj mx%@ !"#%1{DWпx7c333( s j5_B𥝌qf^rMqF֣ցh0UϧgQ@`F v};0mFm 0/Fv`4ggӳz10mFm &ͤ4ggӳz10md4x F QHh h@#@ lv};<G/Iij3i14x F @'iv};<GfcC 4x F QHws0Icg3h j=h66^$hϧg5b0`ڌ@z6s;>F-Gf ?$1l< F QH/A`9N#GkQ@`Fv 3vy<ZZ# ͤ0Icg3yj=h66^Dfcg3h j=h6zMp6s;>F֣ցj3i4MFm 6s;>F֣ցh8Fvy<ZZ# ^Dfcg3h j=h6zNӢvy<ZZ# ͤ4 F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` a:2 (

wool in

tons

 i 02 (

wheat in

tons

H jbz2g `2(

30

 jbz2g `2(

18

  ib1 `2(

D

  ib `2(

E

D  pb 2 (

F

  jbz2g `2(

12

 U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` qg) `2(

Combination

> _l?a2 (

Canada

Wheat

Wool

 % fWl{ `2(

D

W _Pa2(

(Tons)

0

30

K&@ fWf{ `2(

E

 _Pa2(

(Tons)

10

20

eB&@ mW_ 2 (

F

 _Raƀ2 (

(Tons)

18

12

 ~&@ fWs{ `2(

G

! _Pa2(

(Tons)

30

0

"&@ w 8 `2 (

Table A: Canada's Production Possibilities Table

#4 w MZ2 (

Canada's Production Possibilities (PP) Curve:

Note that in going from combination E to F, 8 tons of wool is sacrificed in order to produce an extra 8 tons of wheat. The opportunity cost of one ton of wheat equals one ton of wool. This opportunity cost equals the slope of the line segment EF.

Click on the letter G in Table A above to display this point on the PP Curve.

$b  jbz2g `2(

10

%+ jbz2g `2(

20

&Z@ !"#$%&MrP><~x7c333( sFigure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` a:2 (

wool in

tons

 i 02 (

wheat in

tons

H jbz2g `2(

30

 jbz2g `2(

30

 ib1 `2(

D

  pb? 2 (

G

 ib `2(

E

D  pb 2 (

F

  U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` qg) `2(

Combination

> _l?a2 (

Canada

Wheat

Wool

 % fWl{ `2(

D

W _Pa2(

(Tons)

0

30

K&@ fWf{ `2(

E

 _Pa2(

(Tons)

10

20

eB&@ fW_ `2(

F

 _Pa2(

(Tons)

18

12

 ~&@ mWs{ 2 (

G

! _Raƀ2 (

(Tons)

30

0

"&@ w 8 `2 (

Table A: Canada's Production Possibilities Table

#4 w MZ2 (

Canada's Production Possibilities (PP) Curve:

Note that in going from combination F to G, 12 tons of wool is sacrificed in order to produce an extra 12 tons of wheat. The opportunity cost of one ton of wheat equals one ton of wool. This opportunity cost equals the slope of the line segment FG. Note that the straight line Production Possibility Curve implies a constant opportunity cost. Click here to continue.

$b  jbz2g `2(

18

%  jbz2g `2(

12

& o҇I2 (

Canada's Production

Possibilities Curve

'w@ !"#$%&'1{D1yjx77333333%L'3DH{, O j5_Cpqf^rMqFigure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` qg) `2(

Combination

> _?a2 (

Australia

Wheat

Wool

 % mWl{ 2 (

D

W _Raƀ2 (

(Tons)

0

20

K&@ fWf{ `2(

E

 _Pa2(

(Tons)

4

12

eB&@ fW_ `2(

F

 _Pa2(

(Tons)

8

4

~&@ fWs{ `2(

G

 _Pa2(

(Tons)

10

0

&@ w  `2 (

Table A: Australia's Production Possibilities Table

4 5w MFȭ2 (

Australia's Production Possibilities (PP) Curve:

Based on Table A, above, we can construct the

Production Possibilities Curve for Australia for the 2 goods, wheat and wool, as follows. Click on the letter D in Table A above to display this point on the PP Curve.

b  U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` a:2 (

wool in

tons

  i 02 (

wheat in

tons

d o/I2 (

Australia's Production

Possibilities Curve

z`@1{D=пx77333333L%P:t@){=S@Y6=O#M\q]b\XWs7$x֣ j5_Cpqf^rMqFigure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` Zw M(2 (

Australia's Production Possibilities (PP) Curve:

Click on the letter E in Table A above to display this point on the PP Curve.

b  qg) `2(

Combination

> _?a2 (

Australia

Wheat

Wool

 % mWl{ 2 (

D

W _Raƀ2 (

(Tons)

0

20

K&@ fWf{ `2(

E

 _Pa2(

(Tons)

4

12

eB&@ fW_ `2(

F

 _Pa2(

(Tons)

8

4

~&@ fWs{ `2(

G

 _Pa2(

(Tons)

10

0

&@ w  `2 (

Table A: Australia's Production Possibilities Table

4 a:2 (

wool in

tons

  i 02 (

wheat in

tons

d jbz2g `2(

20

rU ib1 `2(

D

 :  o/I2 (

Australia's Production

Possibilities Curve

!z`@ !1{DK4x77(333L%P:t@){=S@Y6'5L'5*ňy@W=CrGj<n07ʖ6NތVz׭j0mFm 0.zxͤ4ggӳ}J0`S/Fvy<ZϩF @&34xR66=Ŧs;>FֳQfc簙ggӳ}J0`ڌ@#@ `\3/Hhϧg5` g3i14xR6sM"g3h k>0mFm 0.{ v};<gԣ ͤ4a6ϧg5`Ff#69N#GkY(h=Lޤfcg3h k>0m簜8ggӳ}J0`ڌ@#@ `\vy<ZϩF QHh t9N#gցj3i1 F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` w MZ2 (

Australia's Production Possibilities (PP) Curve:

Note that in going from combination D to E, 8 tons of wool is sacrificed in order to produce an extra 4 tons of wheat. The opportunity cost of one ton of wheat equals two tons of wool. This opportunity cost equals the slope of the line segment DE.

Click on the letter F in Table A above to display this point on the PP Curve.

b  q g) `2(

Combination

 >  _?a2 (

Australia

Wheat

Wool

  % f Wl{ `2(

D

 W  _Pa2(

(Tons)

0

20

 K&@ m Wf{ 2 (

E

  _Raƀ2 (

(Tons)

4

12

eB&@ fW_ `2(

F

 _Pa2(

(Tons)

8

4

~&@ fWs{ `2(

G

 _Pa2(

(Tons)

10

0

&@ w  `2 (

Table A: Australia's Production Possibilities Table

4 a:2 (

wool in

tons

  i 02 (

wheat in

tons

d jbz2g `2(

20

rU ib1 `2(

D

 :  ib `2(

E

!  o/I2 (

Australia's Production

Possibilities Curve

"z` jbz2g `2(

12

#  ib0 `2(

4

$ @ !"#$1{DWпx77(333L%P:t@){=S@Y6'5L'5*ňy@W=CrGj<n0=*νkQU@ eN,1cFLkiOMj {ϧg5b0`ڌ@#@ lp F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

` w MZ2 (

Australia's Production Possibilities (PP) Curve:

Note that in going from combination E to F, 8 tons of wool is sacrificed in order to produce an extra 4 tons of wheat. The opportunity cost of one ton of wheat equals two tons of wool. This opportunity cost equals the slope of the line segment EF.

Click on the letter G in Table A above to display this point on the PP Curve.

b  q g) `2(

Combination

 > !_?a2 (

Australia

Wheat

Wool

! % f"Wl{ `2(

D

"W #_Pa2(

(Tons)

0

20

#K&@ f$Wf{ `2(

E

$ %_Pa2(

(Tons)

4

12

%eB&@ m&W_ 2 (

F

& '_Raƀ2 (

(Tons)

8

4

'~&@ f(Ws{ `2(

G

( )_Pa2(

(Tons)

10

0

)&@ *w  `2 (

Table A: Australia's Production Possibilities Table

*4 +a:2 (

wool in

tons

+  ,i 02 (

wheat in

tons

,d j-bz2g `2(

20

-rU j.bz2g `2(

10

 .櫳 i/b1 `2(

D

!/:  i0b `2(

E

"0  p1b 2 (

F

#1  2o/I2 (

Australia's Production

Possibilities Curve

$2z` j3bz2g `2(

12

%3  i4b0 `2(

4

&4  i5b0 `2(

8

'5+  i6b0 `2(

4

(6> @ !"#$%&'(MrP><7x77333(333L%P:t@){=S@YڛB&v(dg^*OJt:~Po\t>gZb\XW⹳Ҏf<@z HQ e/+Az"Ù伶^*I' IP3:XtaoAsxD=go9{Ћ k6%;:5d Q6.#U WYX.#UGOqfUx.VG tT7 8F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

8f@ ` 9a:2 (

wool in

tons

9  :i 02 (

wheat in

tons

:d j;bz2g `2(

20

;U j<bz2g `2(

10

<櫱  i=b1 `2(

D

=:  i>b `2(

E

>  p?b 2 (

F

?  @U2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

We again assume a world economy consisting of the two countries, Canada and Asutralia, which produces just two

goods - wheat and wool. This time we will illustrate the Principle of Comparative Advantage with the aid of graphs

called Production Possibility (PP) Curves. These PP Graphs are explained below.

@` Aw MZ2 (

Australia's Production Possibilities (PP) Curve:

Note that in going from combination F to G, 4 tons of wool is sacrificed in order to produce an extra 2 tons of wheat. The opportunity cost of one ton of wheat equals two tons of wool. This opportunity cost equals the slope of the line segment FG. Note that the straight line Production Possibility Curve implies a constant opportunity cost. Click here to continue.

Ab  Bo/I2 (

Australia's Production

Possibilities Curve

Bz` qCg) `2(

Combination

C> D_?a2 (

Australia

Wheat

Wool

D % fEWl{ `2(

D

EW F_Pa2(

(Tons)

0

20

FK&@ fGWf{ `2(

E

G H_Pa2(

(Tons)

4

12

HeB&@ fIW_ `2(

F

 I J_Pa2(

(Tons)

8

4

!J~&@ mKWs{ 2 (

G

"K L_Raƀ2 (

(Tons)

10

0

#L&@ Mw  `2 (

Table A: Australia's Production Possibilities Table

$M4 jNbz2g `2(

12

%N  iOb0 `2(

4

&O  iPb0 `2(

8

'P׫  iQb0 `2(

4

(Q>  pRb? 2 (

G

)R z @ !"#$%&'()MrP`8,Sx~Db(%ϋ@.h1)jJ㲝:T=%XA!CJ:k]_YIU]ǧ%`C^"jrdq` Ud5@%RNP q1sQ*$KpUz~P5Ki| ώ-@#@ lv};<G.~tlv}:=-gԣ ͤ4+G Fm 6s;>F-G/BZ8[9N#GkQ@`FS69N#GkQ@` 2ggӳb0`ڌ@#@ `^s6s;>F֣ցj3i)6 6s;>F֣ցhM]gq4x F @ H,v};<GfSGFm lv};<G-BsN69N#GkQ@` P Ӭv}:=-GfcY43i14x F @":@#@ lv};0mS43i14x F @uM@#@ lv};<G-^c3h j=h669 Wv};<Gfc;0`ڌ@#@ lv};<GuOB@#@ lv};<G-]S69N#GkQ@` @+9N#GkQ@`FS2 TF2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

Tf@ ` UU-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

U` qV_K`2 (

Wool

V\ rW_[?`2 (

Wheat

W3@ nXW{ 2 (

30

XjEW mYWl{ 2 (

D

YE mZWs{ 2 (

G

ZtB m[W_ 2 (

F

[& n\W{ 2 (

30

\s; n]W{ 2 (

12

]jG- n^W{ 2 (

18

^Z; _ou2 (

Canada's PP Curve

_% q`_K`2 (

Wool

`. ra_[?`2 (

Wheat

a nbW{ 2 (

20

bs ncW{ 2 (

10

c, do2 (

Australia's PP Curve

dRX meW_ 2 (

F

 etr mfW^ 2 (

8

!f̎ mgW^ 2 (

4

"g hj-2 (

Final Assumption: Each nation initially self sufficient at combination F- not specializing nor trading.

We also assume that, initially, each nation is not specializing or trading.Canada is initially at production possibility

combination F, producing 18 tons wheat and 12 tons wool per year. Australia is initially at its production possibility combination F, producing 8 tons of wheat and 4 tons of wool per year. Click here to continue.

#h!¥ @ !"#MrPJix~Dbl(%Mªso-)jJ㲝:TF-G-VC3h j=h669 W,v};<Gfc>3i14x F @3h j=h669 A9N#GkQ@`F469N#GkQ@` E0`ڌ@#@ lv};<Gdf4x F QHh@(%ϋ`.h1)jJ㲝:T=%XA!CJ@Nk]_YIU]ǧ%`C^js dqoSHc6 6s;>F֣ցh[ ѝggӳz10mFm i (ͤ;ϧg5b0`ZHg3h j=h66 0/A>3i16yj=h6z Qvy< F QHh @#@ lv};<gԣ \ivy<ZZ# ͤ4SHFm lv};<G.}hͤ4ggӳz10mOggӳb0`ڌ@#@ `i jF2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

jf@ ` kU-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

k` ql_K`2 (

Wool

l\ rm_[?`2 (

Wheat

m3@ nnW{ 2 (

30

njEW moWl{ 2 (

D

oE mpWs{ 2 (

G

ptB mqW_ 2 (

F

q& nrW{ 2 (

30

rs; nsW{ 2 (

12

sjG- ntW{ 2 (

18

tZ; uou2 (

Canada's PP Curve

u% qv_K`2 (

Wool

v. rw_[?`2 (

Wheat

w nxW{ 2 (

20

xs nyW{ 2 (

10

y, zo2 (

Australia's PP Curve

 zRX m{W_ 2 (

F

!{tr m|W^ 2 (

8

"|̎ m}W^ 2 (

4

#} ~$2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: To answer this we suggest building an opportunity cost table showing the extra cost of producing

one unit of each product in each country: This opportunity cost table, Table B, can be easily constructed based on the production possibilities curves above. Click here to continue.

$~$Bz@ !"#$MrPjڬ p `(%ʿrlOKxTWY-?l B[ɑ)jJ㲝:TFigure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` q_K`2 (

Wool

\ r_[?`2 (

Wheat

3@ nW{ 2 (

30

jEW mWl{ 2 (

D

E mWs{ 2 (

G

tB mW_ 2 (

F

& nW{ 2 (

30

s; ou2 (

Canada's PP Curve

% /2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: To start, we find the opportunity cost (OC) of producing one ton of wheat in Canada. Since we assume a constant cost situation we can compare any two production

possibilty combinations, such as combinations D and G, the two extremes, to find the opportunity cost.

$Bz m_i_`2(

Country

+#[ s_l?`2 (

Canada

+#@ vg4 `2(

1 ton wool costs

[ ~g< 2 (

1 ton wheat costs

S[ o_t`2(

Australia

+# o2 (

Table B: Opportunity Cost Table

&#" 5w & 2(

In going from combination D to G in Canada's PP Curve:

30 extra wheat tons costs 30 extra wool tons so:

1 extra wheat ton costs X extra wool tons where

X = OC = 1 wool ton. Click here to continue.

 cV` yg G 2 (

OC = _____?

!a@@ !MrPlBp `(%ʿs4lOKxTWY-?l B[ɑ)jJ㲝:TFigure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` q_K`2 (

Wool

\ r_[?`2 (

Wheat

3@ nW{ 2 (

30

jEW mWl{ 2 (

D

E mWs{ 2 (

G

tB mW_ 2 (

F

& nW{ 2 (

30

s; ou2 (

Canada's PP Curve

% _/2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: Next, we find the opportunity cost (OC) of producing one ton of wool in Canada. This will be the reciprocal of the opportunity cost of the one ton of wheat - the value that we just found. That is the opportunity cost of one ton of wool = 1/1 = 1 ton of wheat.

$Bz t_r_`2 (

Country

+#[ s_l?`2 (

Canada

+#@ vg( `2(

OC = 1 ton wool

a@ }g8 2 (

1 ton wool costs

[ wg8w `2(

1 ton wheat costs

S[ o_t`2(

Australia

+# o2 (

Table B: Opportunity Cost Table

 &#" w 2(

In finding the opportunity cost of 1 ton of wool we take the

reciprocal of the opportunity cost of one ton of wheat or we

take 1/1 = 1 ton of wheat. Click here to continue.

!cV` yg G 2 (

OC = _____?

"@@ !"MrPkпxKbl܀(%ϋa9T #hF5e;P TFigure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` /逭2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: Next, we find the opportunity cost (OC) of producing one ton of wheat in Australia. We can find this by comparing combination D and G, the two extremes, in Australia.

$Bz t_r_`2 (

Country

+#[ l_i`2(

Canada

+#@ vg( `2(

OC = 1 ton wool

a@ vg4 `2(

1 ton wool costs

[ wg8w `2(

1 ton wheat costs

S[ v_?`2 (

Australia

+# o2 (

Table B: Opportunity Cost Table

&#" yg2 `2(

OC = 1 ton of wheat

@ yg G 2 (

OC = _____?

a@ /w & 2(

In going from combination D to G in Table A above:

10 extra wheat tons costs 20 extra wool tons so:

1 extra wheat ton costs X extra wool tons where

X = OC = 2 wool tons. Click here to continue.

cV` q_K`2 (

Wool

. r_[?`2 (

Wheat

 nW{ 2 (

20

s nW{ 2 (

10

, o2 (

Australia's PP Curve

 RX mW_ 2 (

F

!tr mWl{ 2 (

D

"ii mWs{ 2 (

G

#@ !"#MrPn¨xKbl܀(%ϋ`.h1)jJ㲝:T=%XA!CJ@Nk]_YIU]ǧ%`C^jW}:"lSRhK0VNGKk7K:b7Ъ<2΍CE@\=u x ~rH F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` q_K`2 (

Wool

. r_[?`2 (

Wheat

 nW{ 2 (

20

s nW{ 2 (

10

, o2 (

Australia's PP Curve

RX h/2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Building the Opportunity Cost Table, Table B: Next, we find the opportunity cost (OC) of producing one ton of wool in Australia. We can find this by taking the reciprocal of the opportunity cost of wheat in Australia or

taking 1/2 = 0.5 tons wheat..

$Bz t_r_`2 (

Country

+#[ l_i`2(

Canada

+#@ vg( `2(

OC = 1 ton wool

a@ vg4 `2(

1 ton wool costs

[ wg8w `2(

1 ton wheat costs

S[ v_?`2 (

Australia

+#@ o2 (

Table B: Opportunity Cost Table

&#" yg2 `2(

OC = 1 ton of wheat

@ wg, `2(

OC = 2 tons wool

a@ yg G 2 (

OC = _____?

 @ w 2(

In finding the opportunity cost of 1 ton of wool we take the

reciprocal of the opportunity cost of one ton of wheat or we

take 1/2 =0.50 tons of wheat. Click here to continue.

!cV` mW_ 2 (

F

"sx mWl{ 2 (

D

#]` mWs{ 2 (

G

$Ą@ !"#$MrPg⭴yxKbl((%ϋ`yT #hF5e;P TF֣ցh[ ѝggӳz10mFm i (ͤ;ϧg5b0`ZHg3h j=h66 0/A>3i16yj=h6z Qvy< F QHh @#@ lv};<gԣ \ivy<ZZ# ͤ4SHFm lv};<G.}hͤ4ggӳz10mOggӳb0`ڌ@#@ `Z'eFm 6s;>F֣ցh4x F QHhvVs;>gցj3i1j^gq4x F @'ϧgQ@`FZ'eFm 6s;>gQ-P3h j=h669 Vͤ4ggӳb0`v};<Gfcg3jꞅFvy<ZZ# ZFm 6s;>F֣ցh};<Gfcg3qx7g3h j=h66Tfcg3h j=h6qtF QHhϧg5`s;>F֣ցj3i1 F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` /2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Once the opportunity cost table is completed we can easily pick out which country has the

comparative advantage in each product. Consider the column in Table B entitled "1 ton wheat costs": You can see that an extra 1 ton of wheat costs less to produce in Canada (1 ton wool vs. 2 tons wool) than in Australia.

$Bz m_i_`2(

Country

+#[ s_l?`2 (

Canada

+#@ vg( `2(

OC = 1 ton wool

a@ vg4 `2(

1 ton wool costs

[ wg8w `2(

1 ton wheat costs

S[ o_t`2(

Australia

+#@ o2 (

Table B: Opportunity Cost Table

&#" yg2 `2(

OC = 1 ton of wheat

@ wg, `2(

OC = 2 tons wool

a@ zg67 `2(

OC = .50 tons wheat

;@ w )2 (

Canada has the comparative advantage (lower

opportunity cost) in the production of wheat. Thus,

Canada should specialize and export wheat, should

trade take place. Click here to continue.

ރV` q_K`2 (

Wool

\ r_[?`2 (

Wheat

3@ nW{ 2 (

30

jEW nW{ 2 (

30

 s; nW{ 2 (

12

!jG- nW{ 2 (

18

"Z; ou2 (

Canada's PP Curve

#% q_K`2 (

Wool

$. r_[?`2 (

Wheat

% nW{ 2 (

20

&s nW{ 2 (

10

', o2 (

Australia's PP Curve

(RX mW^ 2 (

8

)̎ mW^ 2 (

4

* mWl{ 2 (

D

+E mWs{ 2 (

G

,v  mW_ 2 (

F

-& mW_ 2 (

F

.sx mWl{ 2 (

D

/]` mWs{ 2 (

G

0Ą@ !"#$%&'()*+,-./0xKbl((%ϋ`yT #hF5e;P T3i16yj=h6z Qvy< F QHh @#@ lv};<gԣ \ivy<ZZ# ͤ4SHFm lv};<G.}hͤ4ggӳz10mOggӳb0`ڌ@#@ `Z'eFm 6s;>F֣ցh4x F QHhvVs;>gցj3i1j^gq4x F @'ϧgQ@`FZ'eFm 6s;>gQ-P3h j=h669 Vͤ4ggӳb0`v};<Gfcg3jꞅFvy<ZZ# ZFm 6s;>F֣ցh};<Gfcg3qx7g3h j=h66Tfcg3h j=h6qtF QHhϧg5`s;>F֣ցj3i1 F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` q_K`2 (

Wool

\ r_[?`2 (

Wheat

3@ nW{ 2 (

30

jEW nW{ 2 (

30

s; nW{ 2 (

12

jG- nW{ 2 (

18

Z; ou2 (

Canada's PP Curve

% q_K`2 (

Wool

. r_[?`2 (

Wheat

 nW{ 2 (

20

s nW{ 2 (

10

, o2 (

Australia's PP Curve

RX mW^ 2 (

8

̎ mW^ 2 (

4

  /逭2 (

Problem 1: Which country has the comparative advantage in the production of each product?

Solution: Consider the column in Table B entitled "1 ton wool costs": You can see that an extra 1 ton of wool costs less to produce in Australia (.5 tons wheat vs. 1 ton wheat) than in Canada.

 $Bz m _i_`2(

Country

 +#[ l _i`2(

Canada

! +#@ v g( `2(

OC = 1 ton wool

" a@ v g4 `2(

1 ton wool costs

# [ wg8w `2(

1 ton wheat costs

$S[ v_?`2 (

Australia

%+#@ o2 (

Table B: Opportunity Cost Table

&&#" yg2 `2(

OC = 1 ton of wheat

'@ wg, `2(

OC = 2 tons wool

(a@ zg67 `2(

OC = .50 tons wheat

);@ w )2 (

Australia has the comparative advantage (lower

opportunity cost) in the production of wool. Thus,

Australia should specialize and export wool, should

trade take place. Click here to continue.

*ރV` mWl{ 2 (

D

+E mWs{ 2 (

G

,v  mW_ 2 (

F

-& mW_ 2 (

F

.sx mWl{ 2 (

D

/]` mWs{ 2 (

G

0Ą@ !"#$%&'()*+,-./0MrPS4S2 F2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

f@ ` U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

` q_K`2 (

Wool

\ r_[?`2 (

Wheat

3@ nW{ 2 (

30

jEW n W{ 2 (

30

 s; n!W{ 2 (

12

!jG- n"W{ 2 (

18

"Z; #ou2 (

Canada's PP Curve

#% q$_K`2 (

Wool

$. r%_[?`2 (

Wheat

% n&W{ 2 (

20

&s n'W{ 2 (

10

', (o2 (

Australia's PP Curve

(RX m)W^ 2 (

8

)̎ m*W^ 2 (

4

* b+Z2 (

Problem 2: If each nation specializes in its area of comparative advantage, what will happen to world production?

Before specialization: Each nation is at production possibility combination F, where total world production is:

18 + 8 = 26 tons wheat and 12 + 4 = 16 tons wool. Click here to continue.

+$Bz m,Wl{ 2 (

D

 ,E m-Ws{ 2 (

G

!-v  m.W_ 2 (

F

".& m/W_ 2 (

F

#/sx m0Wl{ 2 (

D

$0]` m1Ws{ 2 (

G

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Figure 1b: Principle of Comparative Advantage: Graph Illustration

3f@ ` 4U-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

4` q5_K`2 (

Wool

5\ r6_[?`2 (

Wheat

63@ n7W{ 2 (

30

7jEW m8Wl{ 2 (

D

8E m9Ws{ 2 (

G

9v  m:W_ 2 (

F

:& n;W{ 2 (

30

;s; n<W{ 2 (

12

<jG- n=W{ 2 (

18

=Z; >ou2 (

Canada's PP Curve

>% q?_K`2 (

Wool

?. r@_[?`2 (

Wheat

@ nAW{ 2 (

20

As nBW{ 2 (

10

B, Co2 (

Australia's PP Curve

CRX mDW_ 2 (

F

 Dsx mEW^ 2 (

8

!E̎ mFW^ 2 (

4

"F GZ2 (

Problem 2: If each nation specializes in its area of comparative advantage, what will happen to world production?

Before specialization: Each nation is at production possibility combination F, where total world production is:

18 + 8 = 26 tons wheat and 12 + 4 = 16 tons wool.

After specialization: If Canada specializes in wheat (where it has the comparative advantage) it will switch its resources to production combination G and produce 30 tons wheat and 0 tons of wool. If Australia specializes in wool (where it has the comparative advantage) it will switch its resources to production combination D and produce 20 tons wool and 0 tons of wheat. Thus, after specialization total world production will be 30 tons wheat and 20 tons wool.

Click here to continue.

#G$z mHWl{ 2 (

D

$H]` mIWs{ 2 (

G

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Figure 1b: Principle of Comparative Advantage: Graph Illustration

Kf@ ` LU-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

L` qM_K`2 (

Wool

M\ rN_[?`2 (

Wheat

N3@ nOW{ 2 (

30

OjEW mPWl{ 2 (

D

PE mQWs{ 2 (

G

Qv  mRW_ 2 (

F

R& nSW{ 2 (

30

Ss; nTW{ 2 (

12

TjG- nUW{ 2 (

18

UZ; Vou2 (

Canada's PP Curve

V% qW_K`2 (

Wool

W. rX_[?`2 (

Wheat

X nYW{ 2 (

20

Ys nZW{ 2 (

10

Z, [o2 (

Australia's PP Curve

[RX m\W_ 2 (

F

 \sx m]W^ 2 (

8

!]̎ m^W^ 2 (

4

"^ m_Wl{ 2 (

D

#_]` m`Ws{ 2 (

G

$`Ą aZ_2 (

Problem 2: If each nation specializes in its area of comparative advantage, what will happen to world production?

Before specialization: Each nation is at production possibility combination F, where total world production is:

18 + 8 = 26 tons wheat and 12 + 4 = 16 tons wool.

After specialization: If Canada specializes in wheat (where it has the comparative advantage) it will switch its resources to production combination G and produce 30 tons wheat and 0 tons of wool. If Australia specializes in wool (where it has the comparative advantage) it will switch its resources to production combination D and produce 20 tons wool and 0 tons of wheat. Thus, after specialization total world production will be 30 tons wheat and 20 tons wool.

Increased World Production: As a result of specialization based on comparative advantage, total world production of wheat increases from 26 to 30 tons or by 4 tons a year. Also, total world wool production will increase from 16 tons to 20 tons or by 4 tons a year. Click here to continue.

%a$Bz@ !"#$%MrP*t bF2 (

Figure 1b: Principle of Comparative Advantage: Graph Illustration

bf@ ` cU-2 (

1. Principle of Comparative Advantage:

If two countries specialize and export those products in which they have the comparative advantage (lower opportunity

cost) this will result in a more efficient allocation of world resources and total world production will increase.

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

c` qd_K`2 (

Wool

d\ re_[?`2 (

Wheat

e3@ nfW{ 2 (

30

fjEW mgWl{ 2 (

D

gE mhWs{ 2 (

G

hv  miW_ 2 (

F

i& njW{ 2 (

30

js; nkW{ 2 (

12

kjG- nlW{ 2 (

18

lZ; mou2 (

Canada's PP Curve

m% qn_K`2 (

Wool

n. ro_[?`2 (

Wheat

o npW{ 2 (

20

ps nqW{ 2 (

10

q, ro2 (

Australia's PP Curve

rRX msW_ 2 (

F

 ssx mtW^ 2 (

8

!t̎ muW^ 2 (

4

"u mvWl{ 2 (

D

#v]` mwWs{ 2 (

G

$wĄ xZ2 (

Absolute Advantage vs Comparative Advantage:

Note that given the same amount of resources, Canada can produce more of both products, than Australia. This means that Canada has the absolute advantage in both products - wheat and wool - compared to Australia. This is illustrated graphically, in that Canada's PP Curve is further out in the north-east direction, when compared to Australia's PP Curve.

Despite Canada's absolute advantage in the production of both products, world production can still be enhanced by having Australia look after the world's production of wool, the product where Australia has the comparative advantage (not absolute advantage). We finish Figure 1 by noting that it is differences in comparative advantage (opportunity cost) that motivates specialization and trade between nations and NOT differences in absolute advantage.

Click here to continue.

%x$Bz@ !"#$%? vyo2(

End of Figure 1

y @ ?@,4VP#64 zoO2(

Click here to exit Figure 2

zS2 {ww `2 (

Figure 2: Terms of Trade Principle

{f@ ` |@12 (

1. Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

Each country's opportunity cost becomes the "limits of the terms of trade."

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

|@ }/2 (

Problem 3: Suppose Canada specializes and exports wheat to Australia and Canada imports wool from Australia. Find the "limits of the terms of trade" for 1 ton of wheat to be traded by each of these two nations.

Click here to continue.

 }$Bz q~_K`2 (

Wool

 ~\ r_[?`2 (

Wheat

 3@ nW{ 2 (

30

 jEW nW{ 2 (

30

 s; nW{ 2 (

12

jG- nW{ 2 (

18

Z; ou2 (

Canada's PP Curve

% q_K`2 (

Wool

. r_[?`2 (

Wheat

 nW{ 2 (

20

s nW{ 2 (

10

, o2 (

Australia's PP Curve

RX mW^ 2 (

8

̎ mW^ 2 (

4

 mWl{ 2 (

D

E mWs{ 2 (

G

v  mW_ 2 (

F

& mW_ 2 (

F

sx mWl{ 2 (

D

]` mWs{ 2 (

G

Ą@     (@PQ oO2(

Click here to exit Figure 2

 'PůFigure 2: Terms of Trade Principle

f@ ` @12 (

1. Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

Each country's opportunity cost becomes the "limits of the terms of trade."

2. Assumptions: Two Country - Two Product Production Possibilities with Constant Opportunity Cost:

@ /2 (

Problem 3: Suppose Canada specializes and exports wheat to Australia and Canada imports wool from Australia, find the "limits of the terms of trade" for 1 ton of wheat to be traded by each of these two nations.

Solution: Based on the opportunity cost table constructed in Figure 1, you can see that the limits of the terms of trade for 1 ton of wheat are "between 1 ton of wool and 2 tons of wool", which are the opportunity costs of wheat.

$Bz m_i_`2(

Country

+#[ s_l?`2 (

Canada

+#@ vg( `2(

OC = 1 ton wool

a@ vg4 `2(

1 ton wool costs

[ wg8w `2(

1 ton wheat costs

S[ o_t`2(

Australia

+#@ o2 (

Table B: Opportunity Cost Table

&#" yg2 `2(

OC = 1 ton of wheat

@ wg, `2(

OC = 2 tons wool

a@ zg67 `2(

OC = .50 tons wheat

;@ tw 2P2(

If 1 ton of wheat trades for somewhere between 1 and

2 tons of wool, both nations will benefit from this trade.

As an example, if 1 ton of wheat trades for 1.5 tons of

wool both nations will gain from trade.

Click here to continue.

ރV` q_K`2 (

Wool

\ r_[?`2 (

Wheat

3@ nW{ 2 (

30

jEW nW{ 2 (

30

 s; nW{ 2 (

12

!jG- nW{ 2 (

18

"Z; ou2 (

Canada's PP Curve

#% q_K`2 (

Wool

$. r_[?`2 (

Wheat

% nW{ 2 (

20

&s nW{ 2 (

10

', o2 (

Australia's PP Curve

(RX mW^ 2 (

8

)̎ mW^ 2 (

4

* mWl{ 2 (

D

+E mWs{ 2 (

G

,v  mW_ 2 (

F

-& mW_ 2 (

F

.sx mWl{ 2 (

D

/]` mWs{ 2 (

G

0Ą@ !"#$%&'()*+,-./06aPEg VP#6S ww `2 (

Figure 2: Terms of Trade Principle

f@ ` P@逭2 (

1. Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

Each country's opportunity cost becomes the "limits of the terms of trade."

@ /逭2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Click here to continue.

$BF  q_K`2 (

Wool

 r_[?`2 (

Wheat

@ nW{ 2 (

30

jD nW{ 2 (

30

s  nW{ 2 (

12

jFe nW{ 2 (

18

Z  ou2 (

Canada's PP Curve

] q_K`2 (

Wool

 r_[?`2 (

Wheat

P nW{ 2 (

20

A nW{ 2 (

10

,x o2 (

Australia's PP Curve

E mW^ 2 (

8

̂x mW^ 2 (

4

ٴ mWl{ 2 (

D

 DS mWs{ 2 (

G

!퇌 mW_ 2 (

F

"% mW_ 2 (

F

#f mWl{ 2 (

D

$+` mWs{ 2 (

G

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Figure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ L-2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: Before Specialize Column: Recall we are given that initially, before specialization and trade, Canada and Australia are each at point F on their PP Curves. Canada : 12 wool, 18 wheat; Australia: 4 wool, 8 wheat. Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B q_K`2 (

Wool

 r_[?`2 (

Wheat

' ou2 (

Canada's PP Curve

 gW{ `2(

30

ޯ gW{ `2(

30

֞ gW{ `2(

12

oU! gW{ `2(

18

 fWl{ `2(

D

S fWs{ `2(

G

 q_K`2 (

Wool

 r_[?`2 (

Wheat

Dbx gW{ `2(

20

Q ` gW{ `2(

10

 Hi fW^ `2(

4

!f` fW^ `2(

8

"i fWl{ `2(

D

#q` fWs{ `2(

G

$^ o2 (

Australia's PP Curve

%x< ~g; 2 (

Before Specialize

&=J _`aƀ2 (

Point F

18

12

'D fW_ `2(

F

(Խ fW_ `2(

F

)Qx _l?a2 (

Canada

Wheat

Wool

* _?a2 (

Australia

Wheat

Wool

+q _`aƀ2 (

Point F

8

4

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Figure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ /-2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: After Specialize Column: Based on comparative advantage, Canada specializes in wheat at point G (30 wheat, 0 wool) and Australia specializes in wool at point D (20 wool, 0 wheat). Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B q_K`2 (

Wool

 r_[?`2 (

Wheat

' ou2 (

Canada's PP Curve

 gW{ `2(

30

ޯ gW{ `2(

30

֞ gW{ `2(

12

oU! gW{ `2(

18

 fWl{ `2(

D

S fW_ `2(

F

Խ fWs{ `2(

G

Հ q_K`2 (

Wool

 r_[?`2 (

Wheat

Dbx gW{ `2(

20

 Q ` gW{ `2(

10

!Hi fW^ `2(

4

"f` fW^ `2(

8

#i fWl{ `2(

D

$q` fW_ `2(

F

%Qx fWs{ `2(

G

&^ o2 (

Australia's PP Curve

'x< wg8W `2(

Before Specialize

(=J _]a2(

Point F

18

12

)D _c?aƀ2 (

Point G

30

0

*c }g6 2 (

After Specialize

+yJ  _l?a2 (

Canada

Wheat

Wool

,   _?a2 (

Australia

Wheat

Wool

- q  _]a2(

Point F

8

4

. Dg  _baƀ2 (

Point D

0

20

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Figure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ /2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: Exports/Imports Column: We are given that Canada exports 10 tons of wheat to Australia and in return, imports 15 tons of wool from Australia. Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B wg8W `2(

Before Specialize

=J _]a2(

Point F

18

12

D __a2(

Point G

30

0

c o2 (

Exports (-) Imports (+)

R _\aƀ2 (

Given:

-10

+15

# vg2 `2(

After Specialize

yJ q_K`2 (

Wool

 r_[?`2 (

Wheat

' ou2 (

Canada's PP Curve

 gW{ `2(

30

ޯ gW{ `2(

30

֞ fWs{ `2(

G

Հ q_K`2 (

Wool

  r _[?`2 (

Wheat

! Dbx g!W{ `2(

20

"!Q ` g"W{ `2(

10

#"Hi f#Wl{ `2(

D

$#q` $o2 (

Australia's PP Curve

%$x< %_l?a2 (

Canada

Wheat

Wool

&% &_?a2 (

Australia

Wheat

Wool

'&q '_]a2(

Point F

8

4

('Dg (__?a2(

Point D

0

20

)(i )_\aƀ2 (

Given:

+10

-15

*)#i@ !"#$%&'()*P`} *ww `2 (

Figure 2: Terms of Trade Principle

*f@ ` +2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

+@ ,L2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: After Trade Column: If Canada exports 10 wheat tons from the 30 wheat tons it produces, it is left with 20 wheat tons. In return it imports 15 wool tons. Click here to continue.

,3Gj m-_i_`2(

Country

-  .o2 (

Table C: Gains from Trade Table

.B w/g8W `2(

Before Specialize

/=J 0_]a2(

Point F

18

12

0D x1g& 2 (

After Trade

1 2__a2(

Point G

30

0

2c ~3o2(

Exports (-) Imports (+)

32 4_Ya2(

Given:

-10

+15

4# v5g2 `2(

After Specialize

5yJ 6`h2 (

30 - 10 = 20

0 +15 = 15

6 q7_K`2 (

Wool

7 r8_[?`2 (

Wheat

8' 9ou2 (

Canada's PP Curve

9 g:W{ `2(

30

:ޯ g;W{ `2(

30

 ;֞ f<Ws{ `2(

G

!<Հ q=_K`2 (

Wool

"= r>_[?`2 (

Wheat

#>Dbx g?W{ `2(

20

$?Q ` g@W{ `2(

10

%@Hi fAWl{ `2(

D

&Aq` Bo2 (

Australia's PP Curve

'Bx< C_l?a2 (

Canada

Wheat

Wool

(C D_?a2 (

Australia

Wheat

Wool

)Dq E_]a2(

Point F

8

4

*EDg F__?a2(

Point D

0

20

+Fi G_Ya2(

Given:

+10

-15

,G#i@ !"#$%&'()*+,P^} Hww `2 (

Figure 2: Terms of Trade Principle

Hf@ ` I2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

I@ JL2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: After Trade Column: If Australia exports 15 wool tons from the 20 wool tons it produces, it is left with 5 wool tons. In return it imports 10 wheat tons. Click here to continue.

J3Gj mK_i_`2(

Country

K  L_l?a2 (

Canada

Wheat

Wool

L M_?a2 (

Australia

Wheat

Wool

Mq No2 (

Table C: Gains from Trade Table

NB wOg8W `2(

Before Specialize

O=J P_]a2(

Point F

18

12

PD xQg& 2 (

After Trade

Q R__a2(

Point G

30

0

Rb ~So2(

Exports (-) Imports (+)

S2 T_Ya2(

Given:

-10

+15

T" vUg2 `2(

After Specialize

UyJ V`h2 (

30 - 10 = 20

0 +15 = 15

V qW_K`2 (

Wool

W rX_[?`2 (

Wheat

X' You2 (

Canada's PP Curve

 Y gZW{ `2(

30

!Zޯ g[W{ `2(

30

"[֞ f\Ws{ `2(

G

#\Հ q]_K`2 (

Wool

$] r^_[?`2 (

Wheat

%^Dbx g_W{ `2(

20

&_Q ` g`W{ `2(

10

'`Hi faWl{ `2(

D

(aq` bo2 (

Australia's PP Curve

)bx< c_]a2(

Point F

8

4

*cDg d__?a2(

Point D

0

20

+di e_Ya2(

Given:

+10

-15

,e#i f`h2 (

0 + 10 = 10

20 -15 = 5

-f+g@ !"#$%&'()*+,-PEg VP[*<gx5őA܏V(eU)=g&}V@**%ݕjE k!gWJѩMP rӁ>lr3\#\Ne\*A2^f- zI"/ Y6*btlr+8!z>,qP;d,nV?A@^(n^Ň*9l kYt95d%JѩMOoZk>W 9cvpEҖ גr'i-uZH|2˛] Z@-CܷY$$ײA$|%Ѱo,V l[`t79cDP[Figure 2: Terms of Trade Principle

hf@ ` i2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

i@ jI-2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: Gains from Trade Column: Initially, before specialization and trade, Canada was producing 18 wheat tons and 12 wool tons. After specializion and trade Canada is now enjoying 20 wheat tons and 15 wool tons. Canada gained 2 wheat and 3 wool tons. Click here to continue.

j3Gj mk_i_`2(

Country

k  lo2 (

Table C: Gains from Trade Table

lB wmg8W `2(

Before Specialize

m=J n_]a2(

Point F

18

12

nD qog$ `2(

After Trade

o p__a2(

Point G

30

0

pc ~qo2(

Exports (-) Imports (+)

q2 r_Ya2(

Given:

-10

+15

r# vsg2 `2(

After Specialize

syJ t`2(

30 - 10 = 20

0 +15 = 15

t }ug; 2 (

Gains from Trade

u`='i@ v_l?a2 (

Canada

Wheat

Wool

v w_?a2 (

Australia

Wheat

Wool

wq qx_K`2 (

Wool

x ry_[?`2 (

Wheat

 y' zou2 (

Canada's PP Curve

!z g{W{ `2(

30

"{ޯ g|W{ `2(

30

#|֞ f}Ws{ `2(

G

$}Հ q~_K`2 (

Wool

%~ r_[?`2 (

Wheat

&Dbx gW{ `2(

20

'Q ` gW{ `2(

10

(Hi fWl{ `2(

D

)q` o2 (

Australia's PP Curve

*x< _]a2(

Point F

8

4

+Dg __?a2(

Point D

0

20

,i _Ya2(

Given:

+10

-15

-#i `2(

0 + 10 = 10

20 -15 = 5

.+g `h2 (

20 - 18 = + 2

15 - 12 = + 3

/4 @ !"#$%&'()*+,-./PXx5ŌA܏V(eU)=g&}V@**%ݕjE5eR4jSf%\q͓#05ρ;w-s,`^f҂dPs- r+6:6pTy\btl吽 D sOL>YINX6> P:=[9dCr^|x9TA` z#gAA$|%Ѱֲq5d%JѩMOo< Ies5Oy]n=)`kZx;MIk'2C4ɖ\`^-k3'rd^|?[Figure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ I-2 (

Problem 4: Assuming a terms of trade of 1 wheat ton = 1.5 wool tons and that Canada exports 10 tons wheat to Australia for 15 tons of wool (consistent with 1 wheat ton = 1.5 wool tons), calculate each nation's gain from trade.

Solution: Complete Table C below as follows: Gains from Trade Column: Initially, before specialization and trade, Australia was producing 8 wheat tons and 4 wool tons. After specializion and trade Australia is enjoying 10 wheat tons and 5 wool tons. Australia gained 2 wheat and 1 wool tons. Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B wg8W `2(

Before Specialize

=J _]a2(

Point F

18

12

D qg$ `2(

After Trade

 __a2(

Point G

30

0

c ~o2(

Exports (-) Imports (+)

2 _Ya2(

Given:

-10

+15

# vg2 `2(

After Specialize

yJ `2(

30 - 10 = 20

0 +15 = 15

 }g; 2 (

Gains from Trade

ش `h2 (

20 - 18 = +2

15 - 12 =+ 3

4  _l?a2 (

Canada

Wheat

Wool

 _?a2 (

Australia

Wheat

Wool

q q_K`2 (

Wool

  r_[?`2 (

Wheat

!' ou2 (

Canada's PP Curve

" gW{ `2(

30

#ޯ gW{ `2(

30

$֞ fWs{ `2(

G

%Հ q_K`2 (

Wool

& r_[?`2 (

Wheat

'Dbx gW{ `2(

20

(Q ` gW{ `2(

10

)Hi fWl{ `2(

D

*q` o2 (

Australia's PP Curve

+x< _]a2(

Point F

8

4

,Dg __?a2(

Point D

0

20

-i _Ya2(

Given:

+10

-15

.#i `2(

0 + 10 = 10

20 -15 = 5

/+g `h2 (

10 - 8 = + 2

5 - 4 = + 1

04@ !"#$%&'()*+,-./0PFg VPX}8>x5ŌA܏V(eU)=g&}V@**%ݕjE5eR4jSf%\q͓#05ρ;w-s,`^f҂dPs- r+6:6p'9e'e[cH<$6r^"pڀ$·=az#gǢ z"6> P:I+qnZ˦AtSy(F6l]=`5&׍>W 9au{ j5NR5%I&Ysqz൮k8uKazIE tl0y$#= ^n q-r  ww `2 (

Figure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ ]I2 (

NOTE: Table C below indicates that specialization and trade can be a "win-win" situation at the national level if two principles are applied. Each nation specializes according to comparative advantage and each good trades at terms of trade that lie between its opportunity cost to produce in each nation. In this example each wheat ton traded for 1.5 wool tons, which is between wheat's opportunity cost in both nations. Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B wg8W `2(

Before Specialize

=J _]a2(

Point F

18

12

D qg$ `2(

After Trade

 __a2(

Point G

30

0

c ~o2(

Exports (-) Imports (+)

2 _Ya2(

Given:

-10

+15

# vg2 `2(

After Specialize

yJ `2(

30 - 10 = 20

0 +15 = 15

 }g; 2 (

Gains from Trade

ش `h2 (

20 - 18 = +2

15 - 12 =+ 3

4  _l?a2 (

Canada

Wheat

Wool

 _?a2 (

Australia

Wheat

Wool

q q_K`2 (

Wool

  r_[?`2 (

Wheat

!' ou2 (

Canada's PP Curve

" gW{ `2(

30

#ޯ gW{ `2(

30

$֞ fWs{ `2(

G

%Հ q_K`2 (

Wool

& r_[?`2 (

Wheat

'Dbx gW{ `2(

20

(Q ` gW{ `2(

10

)Hi fWl{ `2(

D

*q` o2 (

Australia's PP Curve

+x< _]a2(

Point F

8

4

,Dg __?a2(

Point D

0

20

-i _Ya2(

Given:

+10

-15

.#i `2(

0 + 10 = 10

20 -15 = 5

/+g `h2 (

10 - 8 = +2

5 - 4 = + 1

04@ !"#$%&'()*+,-./0PeT}Sx5ŌA_V(%$@)gCpoqѳ=1);/{#$FY ?9c/XlAe t6֓ĩ@5)`RkY\yQWg<}nRֵaNR5%I&Ysqk\9t={7e\y[єق԰bį*k$A{}B]q/V n <9,q\< 6Cph al8I.UzW$Tz$@n`'>F֣ցj3i1lHggӳb0`ڌ@#@ `ZMm 6s;>F֣ցhDБHhϧG`b0`+7&};F֣ցhHhϧg5b0`3CThϧg5b0`ڌ@jREN#GkQ@`FZaFm 6s;>F-G-VzY69N#gցh7Hhϧg5b0`9P`Fvy<ZZjT0mFm 6s;>F-Guꮌ@#@ lv};<G-_:#69N#GkQ@` Xv,v};Figure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ XI2 (

Canada's Trade Possibility Curve: If Canada specializes and produces 30 tons of wheat and then starts exporting each ton of wheat for 1.5 tons of wool, Canada can now consume beyond its PP Curve - along the dotted line called the Trade Possibility Curve. Note that if Canada were to trade away the entire 30 tons of wheat it produces, Canada would be able to obtain 45 tons of wool- which is indicated on the Trade Possibility Curve. Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B wg8W `2(

Before Specialize

=J _]a2(

Point F

18

12

D qg$ `2(

After Trade

 __a2(

Point G

30

0

c ~o2(

Exports (-) Imports (+)

2 _Ya2(

Given:

-10

+15

# vg2 `2(

After Specialize

yJ `2(

30 - 10 = 20

0 +15 = 15

 }g; 2 (

Gains from Trade

ش `h2 (

20 - 18 = +2

15 - 12 =+ 3

4  _l?a2 (

Canada

Wheat

Wool

 _?a2 (

Australia

Wheat

Wool

q q_K`2 (

Wool

  r_[?`2 (

Wheat

!' oX2 (

Canada's Trade Possibility Curve

is outside of its PP Curve, which

indicates that Canada's standard

of living increases due to trade.

"ԃf gW{ `2(

30

#ޯ gW{ `2(

30

$֞ fWs{ `2(

G

%Հ gW{ `2(

45

&+ _]a2(

Point F

8

4

'Dg __?a2(

Point D

0

20

(i _Ya2(

Given:

+10

-15

)#i `2(

0 + 10 = 10

20 -15 = 5

*+g `h2 (

10 - 8 = +2

5 - 4 = + 1

+4@ !"#$%&'()*+PTfVP!@x5ŌA_V(eίʔR6,g3-8b#05eU$iYɥU IweZz}w-s,ax$P{J I[xz^f$%$@)gCpoqѳʠ[g,nW;d,nV<ֲs:khkIT ٰ t5fyif.ow=)`kZy')bv\Nei,z൮ko!z20ZCgvUjXyt PWUxKI!_$A{}B]q/V n <9,q\< 6Cph al8I.UV AlHr+6I ^@#@ lv};<G.|qHhϧg5b0`kEyӣѰ z10mFm 6s8]kN#GkQ@`F^lY fcg3yj=h6z"kHhϧG`b0`貅m 6s;>F֣ցhz;Fvy<ZZ# ^h`fcg3yj=h6z7b0`ڌ@#@ lv}:=Im 6s;>F֣ցhŀ4x F QHhbFs;>F-Gfcn3i14x F @&@#@ lv}:=-G-IY3lz10mFm 6s8 HhϧG`b0`uFigure 2: Terms of Trade Principle

f@ ` 2?E2 (

Principle of Terms of Trade: For each country to share in the gain in total world output due to specialization, the

terms of trade for any product traded must be somewhere between each country's opportunity cost for that product.

@ I)2 (

Australia's Trade Possibility Curve: If Australia specializes and produces 20 tons of wool and then starts exporting each 1.5 tons of wool for 1 ton of wheat, Australia can now consume beyond its PP Curve - along the dotted line called the Trade Possibility Curve. Note that if Australia were to trade away the entire 20 tons of wool it produces, Australia would be able to obtain 13.33 tons of wheat, which is indicated on the Trade Possibility Curve.

Click here to continue.

3Gj m_i_`2(

Country

  o2 (

Table C: Gains from Trade Table

B wg8W `2(

Before Specialize

=J _]a2(

Point F

18

12

D _]a2(

Point F

8

4

Dg qg$ `2(

After Trade

 __a2(

Point G

30

0

c __?a2(

Point D

0

20

i ~o2(

Exports (-) Imports (+)

2 _Ya2(

Given:

-10

+15

# _Ya2(

Given:

+10

-15

#i vg2 `2(

After Specialize

yJ `2(

30 - 10 = 20

0 +15 = 15

 `2(

0 + 10 = 10

20 -15 = 5

+g }g; 2 (

Gains from Trade

 ش `h2 (

20 - 18 = +2

15 - 12 =+ 3

!4  `h2 (

10 - 8 = +2

5 - 4 = + 1

"4 _l?a2 (

Canada

Wheat

Wool

# _?a2 (

Australia

Wheat

Wool

$q q_K`2 (

Wool

% r_[?`2 (

Wheat

&' oX2 (

Canada's Trade Possibility Curve

is outside of its PP Curve, which

indicates that Canada's standard

of living increases due to trade.

'ԃ4 gW{ `2(

30

(ޯ gW{ `2(

30

)֞ f Ws{ `2(

G

* Հ q _K`2 (

Wool

+  r _[?`2 (

Wheat

, Dbx g W{ `2(

20

- Q ` g W{ `2(

10

. Hi fWl{ `2(

D

/q` gW{ `2(

45

0+ k_M?`2(

13.33

1i@ oCX2 (

Australia's Trade Possibility Curve

is outside of its PP Curve, which

indicates that Australia's standard

of living increases due to trade.

23H@ !"#$%&'()*+,-./012? vo2(

End of Figure 2

 @ ? @,BVPG]0B oO2(

Click here to exit Figure 3

  w; `2 (

Figure 3a: Export Price Principle

 f@ ` e퀭2 (

1. Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Click here to continue.

 @@   ? PAypC oO2(

Click here to exit Figure 3

 'PůFigure 3a: Export Price Principle

f@ ` g2 (

1. Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Export Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

Click here to continue.

@@?VPAqD w; `2 (

Figure 3a: Export Price Principle

f@ ` X[2 (

1. Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Export Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

b. Zero Transportation Costs: We assume that the transportation costs entailed in exporting or importing products between Canada and France are negligable.

Click here to continue.

@@?PA!` w; `2 (

Figure 3a: Export Price Principle

f@ ` H2 (

1. Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Export Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

b. Zero Transportation Costs: We assume that the transportation costs entailed in exporting or importing products between Canada and France are negligable.

c. Comparative Advantages: We assume that Canada has the comparative advantage in bottled water and that France has the comparative advantage in red wine.

Click here to continue.

@@?PA!  w; `2 (

Figure 3a: Export Price Principle

f@ ` }2 (

1. Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Export Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

b. Zero Transportation Costs: We assume that the transportation costs entailed in exporting or importing products between Canada and France are negligable.

c. Comparative Advantages: We assume that Canada has the comparative advantage in bottled water and that France has the comparative advantage in red wine.

d. Competitive Markets: We assume that both products - bottled water and red wine - are produced and sold in competitive markets. This implies that the prices reflect marginal costs, which in turn reflect opportunity costs.

Click here to continue.

@@P@9` yŵ6 ((%f 6\a/C0YA/Inf18g .q= f˪lYA.r Isl< F QHh Ѵ@#@ lv};<G/GL 9N#GkQ@`F!0(ͤ4ggӳz10m6 6s;>F֣ցh&ϧg5b0`ڌ@#@ `^$fcg3lz10m$6yj=h66&Fvy<ZZ# ^Ԙfcg3h j=h6z`QHhϧg5` ,ggӳb0`ڌ@#@ `^fcg3lz10m;%)69N#GkY(hu)MFvy<ZZ# ^4fcg3lz10mK%)6yj=h66I)MFvy< F @U)69N#GkQ@` Ј@#@ lv};<G/AR9N#gցj3i1zQHw9N#GkQ@` f#gցj3i1\h j=h669NIK%Fm 6s;>gQ/AY<Gfcg3)Jhͤ4ggӣѰ z10m1S@#@ lv}:=-G.q14x F QHw9NΔFtz6ZZ# \j`QHhϧg5b0`Fvy<ZZ# \`QHhϧgQ@` L 3ig3h j=h6s)g3h j=h66?fcg3yk>0mT@3vy<ZZ# \QHhϧG`b0`\Mgq4x F @U)69N#gցh?4fcg3yk>0mTggӳz10mFm 0.tJhͤ4ggӣѰ z10m9ԴϧG`b0`ڌ@#@ lp.wJhͤ4ggӳz10mcT@#@ lv};<G.tdͤ4ggӳz10m>Xϧg5b0`ڌ@#@ lp.xdͤ;ϧg5b0`ᬱN#GkQ@`F\jQHhϧG`b0`ENF3Q@`F\4x F QHhϘFvy<ZZ# \KYtz6ZZ# ͤ4ʰFvy<ZZ# \KQHhϧG`b0`!N#GkQ@`gq69N#GkQ@` Y` 9N#GkQ@`F͖69N#GkQ@` ` 9NF3Q@`Fɀ(ͤ4ggӳz10mZ&z10mFm 6s;> (@#@ lv}; ` 3i16yj=h6 Ko !w; `2 (

Figure 3a: Export Price Principle

!f@ ` "̀2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 1: Before Trade Prices For Bottled Water:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

"@ U#I2 (

Problem 1: Based on the demand and supply model below, determine the "before trade price" of bottled water in Canada.

Click here to continue.

#0 $o 2 (

Canada: Bottled Water

$xj %g62 (

D = domestic

demand curve

%s &g12 (

S = domestic

supply curve

& q'_B`2 (

1.00

'B q(_B`2 (

2.00

(B q)_B`2 (

3.00

)Bx q*_B`2 (

4.00

*BC +_Kaƀ2 (

Price

per

Litre

+5 t,_|`2 (

Litres

,c1 <-w % 2(

The supply curve assumes that Canadian firms are the sole suppliers of bottled water in Canada. The demand curve assumes that Canadian consumers are the sole buyers of Canadian bottled water.

-w@P@.pd @`((%ł+^l}ꎈG6,4 m()PP+ˆ%N% X{X,@,-! &lhx ΃\.+v2G %@#@ lv};0mᬒggӳz10mFm 0. (ͤ4ggӳb0`ý%ϧg5b0`ڌ@#@ `\DRQQHhϧg5b0`%Fvy< F @$69N#GkY(hVs;>F֣ցj3i1qFm lv};<G.%Bv}:=-Gfc.@#@ lv};<G.!Bv};<Gfc͔.@#@ lv}:=-G.iBͤ4ggӳz10mᛔ.@#@ lv};F֣ցj3i1qcFm lv};<G..yBv};<Gfc╔.@#@ lv};<G.*Bͤ4ggӳb0`(]Ftz6ZZ# \Prvy<ZZ# ͤ45+gq4x F @t69NF3Q@` WJ3i14x F @%t4x F QHh 2J*3ig3h j=h6pIEg3lz10mFm 0.Bv};<gԣ ͤ4+Fvy< F @de69NF3Q@` ^+9NF3Q@`Fe69N#GkQ@` >^+9NF3Q@`F69N#gցhTfcg3lz10m⽗@#@ lv};<gԣ \Urh j=h669N%/MF֣ցj3i1\O2lz10mFm 6s;> ^ ^c>F֣ցj3i1Ӥ69N#GkQ@` J+9NF3Q@`F$69N#gցhtVs;>F֣ցj3i1qFm 6s;>F-G. /w; `2 (

Figure 3a: Export Price Principle

/f@ ` 0̀2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 1: Before Trade Prices For Bottled Water:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

0@ 1퀭2 (

Problem 1: Based on the demand and supply model below, determine the "before trade price" of bottled water in Canada.

Solution: Canada's bottled water price is $2.00 per litre, where domestic demand equals domestic supply.

Click here to continue.

10 2o 2 (

Canada: Bottled Water

2xj 3g62 (

D = domestic

demand curve

3s 4g12 (

S = domestic

supply curve

4 q5_B`2 (

1.00

5B q6_B`2 (

2.00

6B q7_B`2 (

3.00

7Bx q8_B`2 (

4.00

8BC 9_Kaƀ2 (

Price

per

Litre

95 t:_|`2 (

Litres

:c1 <;w % 2(

The supply curve assumes that Canadian firms are the sole suppliers of bottled water in Canada. The demand curve assumes that Canadian consumers are the sole buyers of Canadian bottled water.

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Figure 3a: Export Price Principle

=f@ ` >̀2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 1: Before Trade Prices For Bottled Water:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

>@ V?_I2 (

Problem 2: Based on the demand and supply model below, determine the "before trade price" of bottled water in France.

Click here to continue.

?0 @oi2 (

France: Bottled Water

@yՀ Ag62 (

D = domestic

demand curve

A\ Bg12 (

S = domestic

supply curve

B,@ qC_B`2 (

1.00

Cкހ qD_B`2 (

2.00

Dк qE_B`2 (

3.00

Eкs qF_B`2 (

4.00

Fк> G_Kaƀ2 (

Price

per

Litre

GY tH_|`2 (

Litres

H\@ <Iw % 2(

The supply curve assumes that Canadian firms are the sole suppliers of bottled water in Canada. The demand curve assumes that Canadian consumers are the sole buyers of Canadian bottled water.

Iw 5Jw % 2(

The supply curve assumes that French firms are the sole suppliers of bottled water in France. The demand curve assumes that French consumers are the sole buyers of French bottled water.

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demand curve

Ms Ng12 (

S = domestic

supply curve

 N #O_B`0 (1.00 !OB #P_B`0 (2.00 "PB #Q_B`0 (3.00 #QBx #R_B`0 (4.00 $RBC /S_Kaƀ0 (Price per Litre %S5 &T_|`0 ( Litres &Tc1@ !"#$%&P@VPYJJUx\*c ((%V8;T zNH%lJC>t}sOsg8SNTRDž9NDzDeO-\c), fP5JpP%.8>ʇB\X".A莄]Sb iwA$U}nt|wdP.ƚ> Bc5b0`ڌ@#@ lv};< I3i1l< F @I&(ͤ4ggӳz10m69N#GkQ@` дbggӳz10mFm `^T4fcg3yj=h6z'ћHhϧg5b0`SJFm lv};<G/CP9NF3Q@`F)@hͤ4ggӳz10m%69N#GkQ@` P3i1l< F @@lv};<Gfc"%j69N#GkQ@` V@#@ lv};F-GfcU@#@ lv};<G/EzV9N#gցj3i1z#ҵQHhϧgQ@` ggӳ}J0`ڌ@#@ `^ԭTfcg3h j=h6z-ҀћHhϧg5b0` JFm 6s;>F֣ցh+UFvy<ZZ# ^Vs;>F֣ցj3i1z0RQHhϧG`b0`,Jg3h j=h66 0.t=(Lz10mFm 6s;>FNFvy<ZZ# \JLQHhϧg5b0`βFvy< F @#5`Fvy ~#gցj3i1^};<Gfcg3zrl b@3vy<ZZ# \PQQHhϧgQ@` J+9N#gցj3i1q\IEFm 6s;>F֣ցh4Vs;>gցj3i1quIEFm 6s;>F֣ցhTfcg3h j=h6qIEFm 6s;>gցhTVs;>F֣ցj3iᾒ@#@ lv}:=-gԣ \5QYvy<ZZ# ͤ4%Fvy< F @w4x F QHh J*3i14x F @d69N#gցhTfcg3h k>0mBggӳz10mFm 0.#Bͤ;ϧg5b0`ĕ(]Ftz6ZZ# \?ћHhϧg5b0`?(]ϧg5b0`ڌ@#@ `\9ћHhϧG`b0`(]Fvy<ZZ# \3rћHhϧgQ@` P9N#gցj3i1pJFm 6s;>F֣ցh\fcg3h k>0m᠕Ҍ@#@ lv};0m.@#@ lv};<G.,yBͤ;ϧg5b0`(]ϧg5b0`ڌ@#@ `\RћHhϧg5b0`](]Fvy< F @ 69NF3Q@` P9N#GkQ@`Ft6 6s;>F֣ցhԮs;>gցj3i1q4JFm 6s;>F֣ցhDs;>F֣ցj3i1pIEFm lv};<G.(v}; ^Figure 3a: Export Price Principle

Vf@ ` Ẁ2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 1: Before Trade Prices For Bottled Water:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

W@ X퀭2 (

Problem 2: Based on the demand and supply model below, determine the "before trade price" of bottled water in France.

Solution: France's bottled water price is $4.00 per litre, where domestic demand equals domestic supply.

Click here to continue.

X0 Yo 2 (

Canada: Bottled Water

Yxj Zg62 (

D = domestic

demand curve

Zs [g12 (

S = domestic

supply curve

[ q\_B`2 (

1.00

\B q]_B`2 (

2.00

]B q^_B`2 (

3.00

^Bx q__B`2 (

4.00

_BC 0`w % 2(

The supply curve assumes that Canadian firms are supplying bottled water just in Canada. The demand curve reflects the total demand by just Canadian consumers (and not foreigners).

`c~ aoi2 (

France: Bottled Water

ayՀ bg62 (

D = domestic

demand curve

b\ cg12 (

S = domestic

supply curve

c,@ qd_B`2 (

1.00

dкހ qe_B`2 (

2.00

eк qf_B`2 (

3.00

fкs qg_B`2 (

4.00

 gк> h_Kaƀ2 (

Price

per

Litre

!h5 ti_|`2 (

Litres

"ic1 j_Kaƀ2 (

Price

per

Litre

#jY tk_|`2 (

Litres

$k\@ 5lw % 2(

The supply curve assumes that French firms are the sole suppliers of bottled water in France. The demand curve assumes that French consumers are the sole buyers of French bottled water.

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Figure 3a: Export Price Principle

nf@ ` ox2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 2: After Trade Price(s) For Bottled Water:

Problem 3: Is it in the self interest of both Canada and France to trade bottled water with each other?

Click here to continue.

o@ po 2 (

Canada: Bottled Water

pxj qg62 (

D = domestic

demand curve

qs rg12 (

S = domestic

supply curve

r qs_B`2 (

1.00

sB qt_B`2 (

2.00

tB qu_B`2 (

3.00

uBx qv_B`2 (

4.00

vBC 0ww % 2(

The supply curve assumes that Canadian firms are supplying bottled water just in Canada. The demand curve reflects the total demand by just Canadian consumers (and not foreigners).

wc~ xoi2 (

France: Bottled Water

xyՀ yg62 (

D = domestic

demand curve

y\ zg12 (

S = domestic

supply curve

z,@ q{_B`2 (

1.00

{кހ q|_B`2 (

2.00

|к q}_B`2 (

3.00

}кs q~_B`2 (

4.00

~к> _Kaƀ2 (

Price

per

Litre

 5 t_|`2 (

Litres

!c1 _Kaƀ2 (

Price

per

Litre

"Y t_|`2 (

Litres

#\@ 5w % 2(

The supply curve assumes that French firms are the sole suppliers of bottled water in France. The demand curve assumes that French consumers are the sole buyers of French bottled water.

$қw@ !"#$Po0 w; `2 (

Figure 3a: Export Price Principle

f@ ` T[2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 2: After Trade Price(s) For Bottled Water:

Problem 3: Is it in the self interest of both Canada and France to trade bottled water with each other?

Solution: Yes. Canadian firms now have the opportunity to export Canadian bottled water at a price somewhere above the current $2.00 Canadian price (and somewhere below the current $4.00 French price). As well, with trade, French buyers can import bottled wine from Canada at a price below the current $4.00 French price (as long as it is above the current $2.00 Canadian price). Click here to continue.

@ o 2 (

Canada: Bottled Water

xj g62 (

D = domestic

demand curve

s g12 (

S = domestic

supply curve

 q_B`2 (

1.00

B q_B`2 (

2.00

B q_B`2 (

3.00

Bx q_B`2 (

4.00

BC 0w % 2(

The supply curve assumes that Canadian firms are supplying bottled water just in Canada. The demand curve reflects the total demand by just Canadian consumers (and not foreigners).

c~ oi2 (

France: Bottled Water

yՀ g62 (

D = domestic

demand curve

\ g12 (

S = domestic

supply curve

,@ q_B`2 (

1.00

кހ q_B`2 (

2.00

к q_B`2 (

3.00

кs q_B`2 (

4.00

к> _Kaƀ2 (

Price

per

Litre

 5 t_|`2 (

Litres

!c1 _Kaƀ2 (

Price

per

Litre

"Y t_|`2 (

Litres

#\@ 5w % 2(

The supply curve assumes that French firms are the sole suppliers of bottled water in France. The demand curve assumes that French consumers are the sole buyers of French bottled water.

$қw@ !"#$P@^ w; `2 (

Figure 3a: Export Price Principle

f@ ` x2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 2: After Trade Price(s) For Bottled Water:

Problem 4: After exporting bottled water to France, what will happen to the price of bottled water in Canada?

Click here to continue.

@ o 2 (

Canada: Bottled Water

xj g62 (

D = domestic

demand curve

s g12 (

S = domestic

supply curve

 q_B`2 (

1.00

B q_B`2 (

2.00

B q_B`2 (

3.00

Bx q_B`2 (

4.00

BC oi2 (

France: Bottled Water

yՀ g62 (

D = domestic

demand curve

\ g12 (

S = domestic

supply curve

,@ q_B`2 (

1.00

кހ q_B`2 (

2.00

к q_B`2 (

3.00

кs q_B`2 (

4.00

к> _Kaƀ2 (

Price

per

Litre

5 t_|`2 (

Litres

 c1 _Kaƀ2 (

Price

per

Litre

!Y t_|`2 (

Litres

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Figure 3a: Export Price Principle

f@ ` 2 (

Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 2: After Trade Price(s) For Bottled Water:

Problem 4: After exporting bottled water to France, what will happen to the price of bottled water in Canada?

Solution: The price of bottled water in Canada will increase as a result of Canada exporting some of its bottled water to France. After trade, the price of Canadian bottled water in Canada will end up somewhere above $2.00 but below $4.00. The graphs below illustrate a situation where the price ends up at $3.00 after trade. Click here to continue.

@ o 2 (

Canada: Bottled Water

xj g62 (

D = domestic

demand curve

s g12 (

S = domestic

supply curve

 q_B`2 (

1.00

B q_B`2 (

2.00

B q_B`2 (

3.00

Bx q_B`2 (

4.00

BC _Kaƀ2 (

Price

per

Litre

5 t_|`2 (

Litres

c1 w M7ح2(

After trade, the price of bottled water increases from $2.00 to $3.00. At $3.00 domestic demand is now less than domestic suppy, so a surplus of bottled water equal to distance ab develops. This surplus reflects the amount of bottled water being exported to France.

Ce oi2 (

France: Bottled Water

yՀ g62 (

D = domestic

demand curve

\ g12 (

S = domestic

supply curve

,@ q_B`2 (

1.00

кހ q_B`2 (

2.00

к q_B`2 (

3.00

 кs q_B`2 (

4.00

!к> _Kaƀ2 (

Price

per

Litre

"YEpM$H%J'N`\a

%GB mWf `2 (

b

&f t_|`2 (

Litres

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c

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d

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Xports

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After trade, the price of bottled water decreases from $4.00 to $3.00. At $3.00 domestic supply is now less than domestic demand so a shortage of bottled water equal to distance cd develops. This shortage reflects the amount of bottled water being imported to France.

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Figure 3a: Export Price Principle

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Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 2: After Trade Price(s) For Bottled Water:

Problem 5: After trade in bottled water takes place, who in the Canadian bottled water industry gains and who loses?

Click here to continue.

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Canada: Bottled Water

xj g62 (

D = domestic

demand curve

s g12 (

S = domestic

supply curve

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1.00

B q_B`2 (

2.00

B q_B`2 (

3.00

Bx q_B`2 (

4.00

BC _Kaƀ2 (

Price

per

Litre

5 t_|`2 (

Litres

c1 oi2 (

France: Bottled Water

yՀ g62 (

D = domestic

demand curve

\ g12 (

S = domestic

supply curve

,@ q_B`2 (

1.00

кހ q_B`2 (

2.00

к q_B`2 (

3.00

кs q_B`2 (

4.00

 к> _Kaƀ2 (

Price

per

Litre

!YEpM$H%J,彻vpRi3%b(;ˠ\"Ia

$GB mWf `2 (

b

%f t_|`2 (

Litres

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c

'a mWf `2 (

d

(< s_h`2 (

Xports

)L_ s_m`2 (

Mports

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After trade, the price of bottled water increases from $2.00 to $3.00. At $3.00 domestic demand is now less than domestic suppy, so a surplus of bottled water equal to distance ab develops. This surplus reflects the amount of bottled water being exported to France.

+Ce w M7ح2(

After trade, the price of bottled water decreases from $4.00 to $3.00. At $3.00 domestic supply is now less than domestic demand so a shortage of bottled water equal to distance cd develops. This shortage reflects the amount of bottled water being imported to France.

,қe@ !$%&'()*+,PWz` w; `2 (

Figure 3a: Export Price Principle

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Export Price Principle: After trade, the price of a product that a nation (e.g. Canada) exports will increase.

Situation 2: After Trade Price(s) For Bottled Water:

Problem 5: After trade in bottled water takes place, who in the Canadian bottled water industry gains and who loses?

Solution: Since bottled water is an export to Canada, the Export Price Principle predicts that the price of bottled water will increase in Canada. This means that Canadian firms supplying Canadian bottled water will benefit while Canadian buyers of Canadian bottled water will lose (due to paying the now higher price). Click here to continue.

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Canada: Bottled Water

xj g62 (

D = domestic

demand curve

s g12 (

S = domestic

supply curve

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1.00

B q_B`2 (

2.00

B q_B`2 (

3.00

Bx q_B`2 (

4.00

BC _Kaƀ2 (

Price

per

Litre

5 t_|`2 (

Litres

c1 oi2 (

France: Bottled Water

yՀ g62 (

D = domestic

demand curve

\ g12 (

S = domestic

supply curve

,@ q_B`2 (

1.00

кހ q_B`2 (

2.00

к q_B`2 (

3.00

кs q_B`2 (

4.00

 к> _Kaƀ2 (

Price

per

Litre

!YEpM$H%J'N`\a

$GB mWf `2 (

b

%f t_|`2 (

Litres

&\@ mW_ `2 (

c

'a mWf `2 (

d

(< s_h`2 (

Xports

)L_ s_m`2 (

Mports

*l` w M7ح2(

After trade, the price of bottled water increases from $2.00 to $3.00. At $3.00 domestic demand is now less than domestic suppy, so a surplus of bottled water equal to distance ab develops. This surplus reflects the amount of bottled water being exported to France.

+Ce w M7ح2(

After trade, the price of bottled water decreases from $4.00 to $3.00. At $3.00 domestic supply is now less than domestic demand so a shortage of bottled water equal to distance cd develops. This shortage reflects the amount of bottled water being imported to France.

,қe@ !#$%&'()*+,PG]0 w; `2 (

Figure 3b: Import Price Principle

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1. Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Click here to continue.

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Figure 3b: Import Price Principle

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1. Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Import Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

Click here to continue.

 @@VPAqS X [2 (

1. Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Import Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

b. Zero Transportation Costs: We assume that the transportation costs entailed in exporting or importing products between Canada and France are negligable.

Click here to continue.

 @ w; `2 (

Figure 3b: Import Price Principle

 f@ `@PA!` H 2 (

1. Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Import Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

b. Zero Transportation Costs: We assume that the transportation costs entailed in exporting or importing products between Canada and France are negligable.

c. Comparative Advantages: We assume that Canada has the comparative advantage in bottled water and that France has the comparative advantage in red wine.

Click here to continue.

 @ w; `2 (

Figure 3b: Import Price Principle

 f@ `@PA!  2 (

1. 1. Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

2. Assumptions: In illustrating the export price principle we make the following assumptions:

a. Two Country - Two Products: We now assume that the two countries considering trade are Canada and France

and the two products are bottled water and red wine. In order to explain the Import Price Principle, we will now switch

from the production possibilities model, where costs were measured in real opportunity costs, to the supply and demand

model where we measure prices in dollar terms. Since we have switched models we will change our country and product examples, so you will not try to relate the numbers in Figure 3 to those displayed in Figures 1 and 2.

b. Zero Transportation Costs: We assume that the transportation costs entailed in exporting or importing products between Canada and France are negligable.

c. Comparative Advantages: We assume that Canada has the comparative advantage in bottled water and that France has the comparative advantage in red wine.

d. Competitive Markets: We assume that both products - bottled water and red wine - are produced and sold in competitive markets. This implies that the prices reflect marginal costs, which in turn reflect opportunity costs.

Click here to continue.

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Figure 3b: Import Price Principle

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 1: Before Trade Prices For Red Wine

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of red wine is set by the domestic demand and domestic supply curves within each nation, as described below.

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Problem 6: Based on the demand and supply model below, determine the "before trade price" of red wine in Canada.

Click here to continue.

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Figure 3b: Import Price Principle

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The supply curve assumes that Canadian firms are the sole suppliers of red wine in Canada. The demand curve assumes that Canadian consumers (and not foreigners) are the sole buyers of Canadian red wine.

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Canada: Red Wine

vL g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

jB #_B`0 (6.00  #_B`0 (7.00  #_B`0 (8.00  #_B`0 (9.00 M /_Kaƀ0 (Price per Litre 4B &_|`0 ( Litres @@P@@pa#Ȟ%?#ɝ26fmIhM&|&攷asn2 ̀2 (

Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 1: Before Trade Prices For Red Wine:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

@ S퀭2 (

Problem 6: Based on the demand and supply model below, determine the "before trade price" of red wine in Canada.

Solution: Canada's red wine price is $9.00 per litre, where domestic demand equals domestic supply.

Click here to continue.

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Figure 3b: Import Price Principle

 f@ ` G!w % 2(

The supply curve assumes that Canadian firms are the sole suppliers of red wine in Canada. The demand curve assumes that Canadian consumers (and not foreigners) are the sole buyers of Canadian red wine.

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Canada: Red Wine

"vL #g62 (

D = domestic

demand curve

# $g12 (

S = domestic

supply curve

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 1: Before Trade Prices For Red Wine:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

+@ Q,P_I2 (

Problem 7: Based on the demand and supply model below, determine the "before trade price" of red wine in France.

Click here to continue.

,0 -w; `2 (

Figure 3b: Import Price Principle

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The supply curve assumes that Canadian firms are the sole suppliers of red wine in Canada. The demand curve assumes that Canadian consumers (and not foreigners) are the sole buyers of Canadian red wine.

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Canada: Red Wine

/vL 0g62 (

D = domestic

demand curve

0 1g12 (

S = domestic

supply curve

1jB #2_B`0 (6.00 2 #3_B`0 (7.00 3 #4_B`0 (8.00 4 #5_B`0 (9.00 5M /6_Kaƀ0 (Price per Litre 64B &7_|`0 ( Litres 7@ A8w % 2(

The supply curve assumes that French firms are the sole suppliers of red wine in France. The demand curve assumes that French consumers (and not foreigners) are the sole buyers of French red wine.

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France: Red Wine

9 :g62 (

D = domestic

demand curve

: ;g12 (

S = domestic

supply curve

 ;< q<_B`2 (

6.00

!< q=_B`2 (

7.00

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8.00

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9.00

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Price

per

Litre

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Litres

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 1: Before Trade Prices For Red Wine:

We begin with Canada and France NOT trading with each other. In supply and demand terms, the price of bottled water is set by the domestic demand and domestic supply curves within each nation, as described below.

C@ DG퀭2 (

Problem 7: Based on the demand and supply model below, determine the "before trade price" of red wine in France.

Solution: France's red wine price is $7.00 per litre, where domestic demand equals domestic supply.

Click here to continue.

D0 Ew; `2 (

Figure 3b: Import Price Principle

Ef@ ` GFw % 2(

The supply curve assumes that Canadian firms are the sole suppliers of red wine in Canada. The demand curve assumes that Canadian consumers (and not foreigners) are the sole buyers of Canadian red wine.

FC ~Go[2 (

Canada: Red Wine

GvL Hg62 (

D = domestic

demand curve

H Ig12 (

S = domestic

supply curve

IjB #J_B`0 (6.00 J #K_B`0 (7.00 K #L_B`0 (8.00 L #M_B`0 (9.00 MM /N_Kaƀ0 (Price per Litre N4B &O_|`0 ( Litres O@ APw % 2(

The supply curve assumes that French firms are the sole suppliers of red wine in France. The demand curve assumes that French consumers (and not foreigners) are the sole buyers of French red wine.

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France: Red Wine

Q Rg62 (

D = domestic

demand curve

R Sg12 (

S = domestic

supply curve

 S< T_Kaƀ2 (

Price

per

Litre

!TyՀ tU_|`2 (

Litres

"U qV_B`2 (

6.00

#V qW_B`2 (

7.00

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8.00

%Xڇ qY_B`2 (

9.00

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 2: After Trade Price(s) For Red Wine:

Problem 8: Is it in the interest of both Canada and France to trade red wine with each other?

Click here to continue.

[@ \w; `2 (

Figure 3b: Import Price Principle

\f@ ` G]w % 2(

The supply curve assumes that Canadian firms are the sole suppliers of red wine in Canada. The demand curve assumes that Canadian consumers (and not foreigners) are the sole buyers of Canadian red wine.

]C< ~^o[2 (

Canada: Red Wine

^vL _g62 (

D = domestic

demand curve

_ `g12 (

S = domestic

supply curve

`jB #a_B`0 (6.00 a #b_B`0 (7.00 b #c_B`0 (8.00 c #d_B`0 (9.00 dM /e_Kaƀ0 (Price per Litre e4B &f_|`0 ( Litres f@ Agw % 2(

The supply curve assumes that French firms are the sole suppliers of red wine in France. The demand curve assumes that French consumers (and not foreigners) are the sole buyers of French red wine.

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France: Red Wine

h ig62 (

D = domestic

demand curve

i jg12 (

S = domestic

supply curve

j< k_Kaƀ2 (

Price

per

Litre

 kyՀ tl_|`2 (

Litres

!l qm_B`2 (

6.00

"m qn_B`2 (

7.00

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8.00

$oڇ qp_B`2 (

9.00

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 2: After Trade Price(s) For Red Wine:

Problem 8: Is it in the self interest of both Canada and France to trade bottled water with each other?

Solution: Yes. Canadian buyers now have the opportunity to import red wine at a price somewhere below the current $9.00 Canadian price (and somewhere above the current $7.00 French price). As well, with trade, French firms can export red wine from Canada at a price above the current $7.00 French price (as long as it is below the current $9.00 Canadian price). Click here to continue.

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Figure 3b: Import Price Principle

sf@ ` Gtw % 2(

The supply curve assumes that Canadian firms are the sole suppliers of red wine in Canada. The demand curve assumes that Canadian consumers (and not foreigners) are the sole buyers of Canadian red wine.

tC ~uo[2 (

Canada: Red Wine

uvL vg62 (

D = domestic

demand curve

v wg12 (

S = domestic

supply curve

wjB #x_B`0 (6.00 x #y_B`0 (7.00 y #z_B`0 (8.00 z #{_B`0 (9.00 {M /|_Kaƀ0 (Price per Litre |4B &}_|`0 ( Litres }@ A~w % 2(

The supply curve assumes that French firms are the sole suppliers of red wine in France. The demand curve assumes that French consumers (and not foreigners) are the sole buyers of French red wine.

~{ ~o2 (

France: Red Wine

 g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

< _Kaƀ2 (

Price

per

Litre

 yՀ t_|`2 (

Litres

! q_B`2 (

6.00

" q_B`2 (

7.00

#ڻ q_B`2 (

8.00

$ڇ q_B`2 (

9.00

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 2: After Trade Price(s) For Red Wine:

Problem 9: After importing red wine from France, what will happen to the price of red wine in Canada?

Click here to continue.

@ w; `2 (

Figure 3b: Import Price Principle

f@ `< ~o[2 (

Canada: Red Wine

vL g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

jB #_B`0 (6.00  #_B`0 (7.00  #_B`0 (8.00  #_B`0 (9.00 M /_Kaƀ0 (Price per Litre 4B &_|`0 ( Litres @ ~o2 (

France: Red Wine

 g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

< _Kaƀ2 (

Price

per

Litre

yՀ t_|`2 (

Litres

 q_B`2 (

6.00

  q_B`2 (

7.00

!ڻ q_B`2 (

8.00

"ڇ q_B`2 (

9.00

#R@ !"#PW*aDVP!] 2 (

Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 2: After Trade Price(s) For Red Wine:

Problem 9: After importing red wine from France, what will happen to the price of red wine in Canada?

Solution: The price of red wine in Canada will decrease as a result of Canada importing some of its red wine to France. After trade, the price of Canadian red wine in Canada will end up somewhere below $9.00 but above $7.00. The graphs below illustrate a situation where the price ends up at $8.00 after trade. Click here to continue.

@ w; `2 (

Figure 3b: Import Price Principle

f@ ` ~o[2 (

Canada: Red Wine

vL g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

jB #_B`0 (6.00  #_B`0 (7.00  #_B`0 (8.00  #_B`0 (9.00 M /_Kaƀ0 (Price per Litre 4B &_|`0 ( Litres @ ~o2 (

France: Red Wine

 g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

< _Kaƀ2 (

Price

per

Litre

yՀ t_|`2 (

Litres

 w M7ح2(

After trade, the price of red wine decreases from $9.00 to $8.00. At $8.00 domestic supply is now less than domestic demand, so a shortage of red wine equal to distance ab develops. This shortage reflects the amount of red wine being imported from France.

 e w M7ح2(

After trade, the price of red wine increases from $7.00 to $8.00. At $8.00, domestic supply exceeds domestic demand, so a surplus of red wine equal to distance cd develops. This surplus reflects the amount of red wine being exported to Canada.

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a

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b

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c

& mWf `2 (

d

' s_m`2 (

Mports

(M s_h`2 (

Xports

)l q_B`2 (

6.00

* q_B`2 (

7.00

+ڻ q_B`2 (

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 2: After Trade Price(s) For Red Wine:

Problem 10: After trade in red wine takes place, who in the Canadian red wine industry gains and who loses?

Click here to continue.

@ w; `2 (

Figure 3b: Import Price Principle

f@ `< ~o[2 (

Canada: Red Wine

vL g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

jB #_B`0 (6.00  #_B`0 (7.00  #_B`0 (8.00  #_B`0 (9.00 M /_Kaƀ0 (Price per Litre 4B &_|`0 ( Litres @ ~o2 (

France: Red Wine

 g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

< _Kaƀ2 (

Price

per

Litre

yՀ t_|`2 (

Litres

  q_B`2 (

6.00

! q_B`2 (

7.00

"ڻ q_B`2 (

8.00

#ڇ q_B`2 (

9.00

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b

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c

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d

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Import Price Principle: After trade, the price of a product that a nation (e.g. Canada) imports will decrease.

Situation 2: After Trade Price(s) For Red Wine:

Problem 10: After trade in red wine takes place, who in the Canadian red wine industry gains and who loses?

Solution: Since red wine is an import to Canada, the Import Price Principle predicts that the price of red wine will decrease in Canada. This means that Canadian firms supplying Canadian red wine will lose while Canadian buyers of red wine will gain (due to paying the now lower price). Click here to continue.

@ w; `2 (

Figure 3b: Import Price Principle

f@ `< ~o[2 (

Canada: Red Wine

vL g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

jB #_B`0 (6.00  #_B`0 (7.00  #_B`0 (8.00  #_B`0 (9.00 M /_Kaƀ0 (Price per Litre 4B &_|`0 ( Litres @ ~o2 (

France: Red Wine

 g62 (

D = domestic

demand curve

 g12 (

S = domestic

supply curve

< _Kaƀ2 (

Price

per

Litre

yՀ t_|`2 (

Litres

 q_B`2 (

6.00

  q_B`2 (

7.00

!ڻ q_B`2 (

8.00

"ڇ q_B`2 (

9.00

#R mW_ `2 (

a

$Fs mWf `2 (

b

%es mW_ `2 (

c

& mWf `2 (

d

' s_m`2 (

Mports

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Xports

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End of Figure 3

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