Question

	Wheat	Cloth
Canada	5 KG	5 METRE
US	2 KG	4 METRE

1. Does any country have absolute advantage in the production of wheat and cloths?
2. How will trade take place on the basis on comparative advantage? Who will specialize in what?

Answer 1

1. Canada can produce more amount of both goods with the same level of resources. Therefore, Canada has an absolute advantage in the production of both goods.

2.

Canada's opportunity cost of 1 KG of wheat = 5/5 = 1 meter cloth

Canada's opportunity cost of 1 meter cloth = 5/5 = 1 KG of wheat

US's opportunity cost of 1 KG of wheat = 4/2 = 2 meter cloth

US's opportunity cost of 1 meter cloth = 2/4 = 0.5 KG of wheat

So, Canada has a lower opportunity cost in wheat and the US has a lower opportunity cost in cloth.

So, Canada has a comparative advantage in wheat and the US has a comparative advantage in cloth.