Question

Suppose that the United States and Canada can each produce two products: lumber and beef. Create a table like the one below, showing labor requirements per unit of output for each country. (Hint: Choose numbers for each country that are easily divisible by one another.) Labor Requirements per Unit of Output United States Canada Lumber Beef What does absolute advantage mean? How do you calculate absolute advantage? In what output(s) does the U.S. have an absolute advantage? Explain using the data from your table. In what output(s) does Canada have an absolute advantage? Explain using the data from your table. What does comparative advantage mean? How do you calculate comparative advantage? In what output(s) does the U.S. have a comparative advantage? Explain using the data from your table. In what output(s) does Canada have a comparative advantage? Explain using the data from your table. What product should each country export? Why?

Answer 1

Lumber beef

USA 6 5

Canada 3 8

Absolute advantage means country can produce more of good than rival. We calculate it just by comparing labour requirement. Lesser the labour requirement greater the absolute advantage. Usa has absolute advantage in beef. Canada has absolute advantage in lumber. Comparative advantage means country can produce a good at lower cost than rival. We calculate it by comparing relative price. Smaller the relative price greater the comparative advantage. Here usa has comparative advantage in lumber as it's cost of 5/6 is Lower than that of Canada. Canada has comparative advantage in beef. Usa should export beef as it has comparative advantage in it and canada should export lumber