Canadian and Japanese workers can each produce 4 cars per year. A Canadian worker can produce 10 tonnes of grain per year, whereas a Japanese worker can produce 5 tonnes of grain per year. To keep things simple, assume that each country has 100 million workers.
a. Starting from a position without trade, give a numerical example in which trade makes each country better off.
answer the part a
Suppose Canada shifts one worker from producing cars to producing grain. So Canada will produce 4 fewer cars and 10 additional tonnes of grain. Canada would then trade with Japan. The trade agreement would be Canada would trade 7 tonnes of grain, for Japan to give 4 cars. Canad will surely do this because the value of 4 cars in Canada is 10 tonnes of grain. Looking into Japan, if Japan switches one worker from producing grain to producing the car. Then Japan will produce 4 cars more for 5 tonnes less grain. This means that the value of 4 cars in Japan is 5 tonnes. So, Japan will surely accept the trade from Canada as it is beneficial. So, the trade makes each country better off.
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