Question

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.

a. Suppose that, per unit of resources deployed, Ontario can produce 3 bushels of wheat or 1 bushel of corn, while Quebec can produce 1 bushel of wheat or 1 bushel of corn. Ontario has an absolute advantage in wheat production, but Quebec has a comparative advantage in corn production.

b. The data above tells us that trading wheat from Ontario to Quebec at a price of 2 bushels of wheat per bushel of corn will make both provinces better off.

Answer 1

A. True

As given Ontario can produce 3 bushels of wheat or 1 bushel of corn, while Quebec can produce 1 bushel of wheat or 1 bushel of corn. This means that Ontario has an absolute advantage in wheat production, 3:1..

However from the perspective of opportunity cost in comparative advantage,

Wheat/Corn for Ontario = 3:1

Wheat/Corn fro Quebec = 1:1

Hence it is beneficial for Ontario to produce Wheat and gain specialization in its production. Whereas Quebec must gain specialization in the production of Bushels of corn.

2. True

Once both nations start producing the goods in which they have comparative advantages, mutual trade is beneficial for both of them. Trading wheat from Ontario to Quebec at a price of 2 bushels of wheat per bushel of corn will make both provinces better off. By doing the above, Ontario will be left with 1 bushel of wheat and 1 bushel of corn. On the other hand, Quebec would be left with2 bushel of wheat. Without trade, Ontario would have only 1 bushel of corn and Quebec with 1 bushel of wheat.