Reference no: EM133552399

The maximum amount of steel or aluminum that Canada and France can produce if they fully use all the factors of production at their disposal with the best technology available to them is shown (hypothetically) in Table 2.9. Assume that production occurs under constant-cost conditions. On graph paper, draw the production possibilities schedules for Canada and France; locate aluminum on the horizontal axis and steel on the vertical axis of each country's graph. In the absence of trade, assume that Canada produces and consumes 600 tons of aluminum and 300 tons of steel, and that France produces and consumes 400 tons of aluminum and 600 tons of steel. Denote these autarky points on each nation's production possibilities schedule.

Question a) Determine the MRT of steel into aluminum for each nation. According to the principle of comparative advantage, should the two nations specialize? If so, which product should each country produce? Will the extent of specialization be complete or partial? Denote each nation's specialization point on its production possibilities schedule. Compared to the output of steel and aluminum that occurs in the absence of trade, does specialization yield increases in output? If so, by how much?

Question b) Within what limits will the terms of trade lie if specialization and trade occur? Suppose Canada and France agree to a terms-of-trade ratio of 1:1 (1 ton of steel 1 ton of aluminum). Draw the terms-of-trade line in the diagram of each nation. Assuming that 500 tons of steel are traded for 500 tons of aluminum, are Canadian consumers better off as the result of trade? If so, by how much? How about French consumers?

c) Describe the trade triangles for Canada and France.