42. In Canada, the production of 1 unit of food (F) requires 1/8 of a unit of labour and the production of 1 unit of shelter (S) requires 1/6 of a unit of labour. In Morocco, the production of 1 unit of food (F) requires 1/4 of a unit of labour and the production of 1 unit of shelter (S) requires 1/2 of a unit of labour. Canada has 30 units of labour and Morocco has 60 units of labour. In the absence of trade, Canada produces and consumes 120 units of food and 90 units of shelter, and Morocco produces and consumes 120 units of food and 60 units of shelter. These two products and these two countries are the only ones in the world. When trade is opened up, the two countries trade food for shelter at a 3-to-2 ratio, and 120 units of food and 80 units of shelter are exchanged. On the diagrams provided, draw and clearly label the production possibilities curve for each country. Indicate where each country starts out before trade occurs (with a Co for Canada and a Mo for Morocco). Indicate the point at which each country produces (using a Cp for Canada and a Mp for Morocco) and consumes (using a C* for Canada and a M* for Morocco), and show the trading line (the consumption possibilities curve) for each country. Label your diagram as completely as possible. Below the diagram, describe in 10 words or less how we know that both countries are made better off by trade. (10 marks)
Related textbook solutions
Related questions
The following table provides data on the productivity of a single unit of a resource in producing clothing and cars in both Japan and Canada.
|
|
One Unit of Resource Produces either/or but not both |
|
|
|
Clothing (meters) |
Cars |
|
Japan |
6 |
2 |
|
Canada |
2 |
1 |
For simplicity, assume that these are the only two countries in the world, the production of each product in each country is subject to constant returns, and each country maintains full employment thanks to costless mobility of resources within the same country. Suppose Canada is endowed with 50 units of this all-purpose resource while Japan is endowed with 20 units. Answer the following questions. Justify your answers.
Suppose that, when trade between the two countries is not permissible, each country allocates half of its resource endowment to the production of one good.
a)If trade between the two countries is permissible. Which country would specialize in the production of clothing? Which country would specialize in the production of cars? Indicate the production points of each country in this case. What is the world total output of each product in this case?
