Question

Required information Below is the productivity per worker (kilos per day) in the rice and beer industries of Catalonia and Granada. The working population in each country is 12 million people. Rice Beer Catalonia 4 Or 3 Granada 3 Or 2 Refer to the data above to answer this question. Suppose that initially each country allocated 5 million of its population to the rice industry, the rest being employed in the beer industry. If they now decide to totally specialize in the products in which each has a comparative advantage, what will be the resulting gains from trade? Multiple Choice 35 rice and 35 beer. 21 rice and 0 beer. 1 rice and 1 beer. 0 rice and 25 beer.

Required information

Below is some hypothetical data for the countries of Canada and Mexico. (Assume that Canada has 10 million workers per month available and Mexico has 20 million.)

Canada's Production Possibilities
(Output in millions of bushels per month)

	A	B	C	D	E
Rye	300	225	150	75	0
Beans	0	50	100	150	200

Mexico's Production Possibilities
(Output in millions of bushels per month)

	A	B	C	D	E
Rye	40	30	20	10	0
Beans	0	20	40	60	80

Output Before Trade
(Output in millions of bushels per month)

	Rye	Beans
Canada	225	50
Mexico	30	20

Refer to the information above to answer this question. If each country totally specializes according to its comparative advantage and the terms of trade are 1 bushel of beans for 1.25 bushels of rye, what will be the gains from trade?

Multiple Choice

• 45 bushels of rye and 10 bushels of beans.

• 25 bushels of rye and 10 bushels of beans.

• 60 bushels of rye and 100 bushels of beans.

• There are no gains from trade.

Answer 1

Opportunity cost of producing Rye in

Canada = 50/75 = 0.66 bushels of beans.

Mexico = 20/10 = 2 bushels of beans.

Hence Canada has a comparative advantage in the production of Rye because it has a lower opportunity cost in terms of beans. Mexico has a comparative advantage in production of beans.

Hence total Rye production by Canada = 300 bushels.

Total beans prooduction by Mexico = 80 bushels.

Before trade total Rye production = 225+30 = 255 bushels; and total bean production = 50+20 = 70 bushles.

Gains from trade = 300-255 = 45 bushels of Rye and 80-70 = 10 bushels of beans.

Hence the correct option is

45 bushels of rye and 10 bushels of beans.