Question

Assume a worker in the US can produce 3 tons of apples or 6 tons of lumber and a worker in Canada can produce 2 tons of apples or 8 tons of lumber. If under free trade the global price of apples is $1000 per ton, between what two prices for lumber would the US and Canada trade?

Answer 1

For USA,

Opportunity cost to produce 1 ton of Apples = 6/3 = 2 tons of lumber

For Canada,

Opportunity cost to produce 1 ton of Apples = 8/2 = 4 tons of lumber

So,

USA has comparative advantage in producing Apples and Canada has comparative advantage in producing lumber, on the basis of lower opportunity cost.

Further,

if the price of 1 ton of apple is $1000, then range of price of lumber will be from $250 per ton of lumber to $500 per ton of lumber. This is the two price for lumber, US and Canada will trade for Apple with each other.