Chapter 3

Interdependence and the Gains from Trade

SOLUTIONS TO TEXTBOOK PROBLEMS

Quick Quizzes

1. Draw an example of a production possibilities frontier for Robinson Crusoe, a shipwrecked sailor
who spends his time gathering coconuts and catching fish. Does this frontier limit Crusoe’s
consumption of coconuts and fish if he lives by himself? Does he face the same limits if he can
trade with natives on the island?

Figure 1 shows a production possibilities frontier for Robinson Crusoe between gathering
coconuts and catching fish. If Crusoe lives by himself this frontier limits his consumption of
coconuts and fish, but if he can trade with natives on the island he will be able to consume at a
point outside his production possibilities frontier.

Figure 1

2. Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His friend Friday can gather 30
coconuts or catch 2 fish per hour. What is Crusoe’s opportunity cost of catching one fish? What is
Friday’s? Who has an absolute advantage in catching fish? Who has a comparative advantage in
catching fish?

Crusoe’s opportunity cost of catching one fish is 10 coconuts, since he can gather 10 coconuts in
the same amount of time it takes to catch one fish. Friday’s opportunity cost of catching one fish
is 15 coconuts, since he can gather 30 coconuts in the same amount of time it takes to catch two
fish. Friday has an absolute advantage in catching fish, since he can catch two per hour while
Crusoe can only catch one per hour. But Crusoe has a comparative advantage in catching fish,
since his opportunity cost of catching a fish is less than Friday’s.

3. Suppose that a skilled brain surgeon also happens to be the world’s fastest typist. Should he do
his own typing or hire a secretary? Explain.

If the world’s fastest typist happens to be trained in brain surgery, he should hire a secretary. He
has an absolute advantage in typing but a comparative advantage in brain surgery, since his
opportunity cost in brain surgery is low compared to the opportunity cost for other people.

Copyright © 2017 Nelson Education Ltd.

20 • Chapter 3: Interdependence and the Gains from Trade

Questions for Review

1. Under what conditions is the production possibilities frontier linear rather than bowed out?

The production possibilities frontier is linear when the opportunity cost of increasing the
production of one good is always the same irrespective of the current level of production. This
constant opportunity cost reflects the homogeneity of the factors of production: all workers
spend the same amount of time in both activities, and no resources are more suitable for
producing one good as compared to the other.

2. Explain how absolute advantage and comparative advantage differ.

Absolute advantage reflects a comparison of the productivity of one person, firm, or nation to
that of another, while comparative advantage is based on the relative opportunity costs of the
persons, firms, or nations. While a person, firm, or nation may have an absolute advantage in
producing every good, they can't have a comparative advantage in every good.

3. Give an example in which one person has an absolute advantage in doing something but another
person has a comparative advantage.

Many examples are possible. Suppose, for example, that Roger can prepare a fine meal of hot
dogs and macaroni in just 10 minutes, while it takes Anita 20 minutes. And Roger can do all the
wash in three hours, while it takes Anita four hours. Roger has an absolute advantage in both
cooking and doing the wash, but Anita has a comparative advantage in doing the wash (the wash
takes the same amount of time as 12 meals, while it takes Roger 18 meals’ worth of time).

4. Is absolute advantage or comparative advantage more important for trade? Explain your
reasoning using the example in your answer to question 3.

Comparative advantage is more important for trade than absolute advantage. In the example in
question 3, Anita and Roger will complete their chores more quickly if Anita does at least some of
the wash and Roger cooks the fine meals for both, because Anita has a comparative advantage
in doing the wash, while Roger has a comparative advantage in cooking.

5. If two parties trade based on comparative advantage and both gain, in what range must the
price of the trade lie?

In order for trade to benefit both parties, the price for the trade must lie between the partie s’
opportunity costs.

6. Why do economists tend to oppose policies that restrict trade among nations?

Economists oppose policies that restrict trade among nations because trade allows all countries to
achieve greater prosperity by allowing them to receive the gains from comparative advantage.
Restrictions on trade can hurt all countries.

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 21

Quick Check Multiple Choice

1. In an hour, Ken can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1 lawn. Who has
the absolute advantage in car washing, and who has the absolute advantage in lawn mowing?
a. Ken in washing, Ron in mowing
b. Ron in washing, Ken in mowing
c. Ken in washing, neither in mowing
d. Ron in washing, neither in mowing

2. Once again, in an hour, Ken can wash 2 cars or mow 1 lawn, and Ron can wash 3 cars or mow 1
lawn. Who has the comparative advantage in car washing, and who has the comparative advantage
in lawn mowing?
a. Ken in washing, Ron in mowing
b. Ron in washing, Ken in mowing
c. Ken in washing, neither in mowing
d. Ron in washing, neither in mowing

3. What results when two individuals produce efficiently and then make a mutually beneficial trade
based on comparative advantage?
a. they both obtain consumption outside their production possibilities frontier
b. they both obtain consumption inside their production possibilities frontier
c. one individual consumes inside her production possibilities frontier, while the other consumes
outside hers
d. each individual consumes a point on her own production possibilities frontier

4. Which goods will a nation typically import?

a. those goods in which the nation has an absolute advantage
b. those goods in which the nation has a comparative advantage
c. those goods in which other nations have an absolute advantage
d. those goods in which other nations have a comparative advantage

5. Suppose that in Canada, producing an aircraft takes 10 000 hours of labour and producing a shirt
takes 2 hours of labour. In China, producing an aircraft takes 40 000 hours of labour and producing a
shirt takes 4 hours of labour. What will these nations trade?
a. China will export aircraft, and Canada will export shirts.
b. China will export shirts, and Canada will export aircraft.
c. Both nations will export shirts.
d. There are no gains from trade in this situation.

6. Mark can cook dinner in 30 minutes and wash the laundry in 20 minutes. His roommate takes half as
long to do each task. How should the roommates allocate the work?
a. Mark should do more of the cooking based on his comparative advantage.
b. Mark should do more of the washing based on his comparative advantage.
c. Mark should do more of the washing based on his absolute advantage.
d. There are no gains from trade in this situation.

1. d
2. b
3. a
4. d
5. b
6. d

Copyright © 2017 Nelson Education Ltd.

22 • Chapter 3: Interdependence and the Gains from Trade

Problems and Applications

1. Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an
hour. She spends 5 hours per day studying.
a. Draw Maria’s production possibilities frontier for reading economics and sociology.
b. What is Maria’s opportunity cost of reading 100 pages of sociology?

a. See Figure 2. If Maria spends all five hours studying economics she can read 100 pages,
so that is the vertical intercept of the production possibilities frontier. If she spends all
five hours studying sociology she can read 250 pages, so that is the horizontal intercept.
The time costs are constant, so the production possibilities frontier is a straight line.

Figure 2

b. It takes Maria two hours to read 100 pages of sociology. In that time, she could read 40
pages of economics. So the opportunity cost of 100 pages of sociology is 40 pages of
economics.

2. Canadian and Japanese workers can each produce 4 cars per year. A Canadian worker can
produce 10 tonnes of grain per year, whereas a Japanese worker can produce 5 tonnes of grain
per year. To keep things simple, assume that each country has 100 million workers.
a. For this situation, construct a table analogous to panel (a) in Figure 3.1.
b. Graph the production possibilities frontier of the Canadian and Japanese economies.
c. For Canada, what is the opportunity cost of a car? Of grain? For Japan, what is the
opportunity cost of a car? Of grain? Put this information in a table analogous to Table
3.1.
d. Which country has an absolute advantage in producing cars? In producing grain?
e. Which country has a comparative advantage in producing cars? In producing grain?
f. Without trade, half of each country’s workers produce cars and half produce grain.
What quantities of cars and grain does each country produce?
g. Starting from a position without trade, give an example in which trade makes each
country better off.

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 23

a.
Workers needed to make:
One car One tonne of grain
Canada 1/4 1/10
Japan 1/4 1/5

b. See Figure 3. With 100 million workers and 4 cars per worker, if either economy were
devoted completely to cars it could make 400 million cars. Since a Canadian worker can
produce 10 tonnes of grain, if Canada produced only grain it would produce 1000 million
tonnes. Since a Japanese worker can produce 5 tonnes of grain, if Japan produced only
grain it would produce 500 million tonnes. These are the intercepts of the production
possibilities frontiers shown in the figure. Note that since the tradeoff between cars and
grain is constant, the production possibilities frontier is a straight line.

Canada

Grain (millions of tonnes)

Figure 3

c. Since a Canadian worker produces either 4 cars or 10 tonnes of grain the opportunity
cost of 1 car is 2-1/2 tonnes of grain, which is 10 divided by 4. Since a Japanese worker
produces either 4 cars or 5 tonnes of grain the opportunity cost of 1 car is
1-1/4 tonnes of grain, which is 5 divided by 4. Similarly, the Canadian opportunity cost of
1 tonne of grain is 2/5 car (4 divided by 10) and the Japanese opportunity cost of 1
tonne of grain is 4/5 car (4 divided by 5). This gives the following table:

Opportunity Cost of:

1 car (in terms of tonnes 1 tonne of grain (in terms
of grain given up) of cars given up)
Canada 2-1/2 2/5
Japan 1-1/4 4/5

d. Neither country has an absolute advantage in producing cars, since they’re equally
productive (the same output per worker); Canada has an absolute advantage in
producing grain, since it is more productive (greater output per worker).

Copyright © 2017 Nelson Education Ltd.

24 • Chapter 3: Interdependence and the Gains from Trade

e. Japan has a comparative advantage in producing cars, since it has a lower opportunity
cost in terms of grain given up. Canada has a comparative advantage in producing grain,
since it has a lower opportunity cost in terms of cars given up.

f. With half the workers in each country producing each of the goods, Canada would
produce 200 million cars (that is, 50 million workers times 4 cars each) and 500 million
tonnes of grain (50 million workers times 10 tonnes each). Japan would produce 200
million cars (50 million workers times 4 cars each) and 250 million tonnes of grain (50
million workers times 5 tonnes each).

g. From any situation with no trade, in which each country is producing some cars and
some grain, suppose Canada changed 1 worker from producing cars to producing grain.
That worker would produce 4 fewer cars and 10 additional tonnes of grain. Then
suppose Canada offers to trade 7 tonnes of grain to Japan for 4 cars. Canada will do this
because it values 4 cars at 10 tonnes of grain, so it will be better off if the trade goes
through. Suppose Japan changes 1 worker from producing grain to producing cars. That
worker would produce 4 more cars and 5 fewer tonnes of grain. Japan will take the trade
because it values 4 cars at 5 tonnes of grain, so it will be better off. With the trade and
the change of 1 worker in both Canada and Japan, each country gets the same number
of cars as before and both get additional tonnes of grain (3 for Canada and 2 for Japan).
Thus, by trading and changing their production both countries are better off.

3. Pat and Kris are roommates. They spend most of their time studying (of course), but they leave
some time for their favourite activities: making pizza and brewing root beer . Pat takes 4 hours to
brew 5 L of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew 5 L of root beer
and 4 hours to make a pizza.
a. What is each roommate’s opportunity cost of making a pizza? Who has the absolute
advantage in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade products with each other, who will trade away pizza in exchange
for root beer?
c. The price of pizza can be expressed in terms of litres of root beer. What is the highest
price at which pizza can be traded that would make both roommates better off? What
is the lowest price? Explain.

a. Pat’s opportunity cost of making a pizza is 2.5 litres of root beer, since she could brew
2.5 litres in the time (2 hours) it takes her to make a pizza. Pat has an absolute
advantage in making pizza since she can make one in 2 hours, while it takes Kris 4
hours. Kris’s opportunity cost of making a pizza is 3-1/3 litres of root beer, since she
could brew 3-1/3 litres in the time (4 hours) it takes her to make a pizza. Since Pat’s
opportunity cost of making pizza is less than Kris’s, Pat has a comparative advantage in
making pizza.

b. Since Pat has a comparative advantage in making pizza, she will make pizza and
exchange it for root beer that Kris makes.

c. The highest price of pizza in terms of root beer that will make both roommates better off
is 3-1/3 litres of root beer. If the price were higher than that, then Kris would prefer
making her own pizza (at an opportunity cost of 3-1/3 litres of root beer) rather than
trading for pizza that Pat makes. The lowest price of pizza in terms of root beer that will
make both roommates better off is 2-1/2 litres of root beer. If the price were lower than
that, then Pat would prefer making her own root beer (she can make 2-1/2 litres of root
beer instead of making a pizza) rather than trading for root beer that Kris makes.

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 25

4. Suppose that there are 10 million workers in Canada, and that each of these workers can
produce either 2 cars or 30 tonnes of wheat in a year.
a. What is the opportunity cost of producing a car in Canada? What is the opportunity
cost of producing a tonne of wheat in Canada? Explain the relationship between the
opportunity costs of the two goods.
b. Draw Canada’s production possibilities frontier. If Canada chooses to consume 10
million cars, how much wheat can it consume without trade? Label this point on the
production possibilities frontier.
c. Now suppose that the United States offers to buy 10 million cars from Canada in
exchange for 20 tonnes of wheat per car. If Canada continues to consume 10 million
cars, how much wheat does this deal allow Canada to consume? Label this point on
your diagram. Should Canada accept the deal?

a. Since a Canadian worker can make either 2 cars a year or 30 tonnes of wheat, the
opportunity cost of a car is 15 tonnes of wheat. Similarly, the opportunity cost of a tonne
of wheat is 1/15 of a car. The opportunity costs are the reciprocals of each other.

b. See Figure 4. If all 10 million workers produce 2 cars each they produce a total of 20
million cars, which is the vertical intercept of the production possibilities frontier. If all 10
million workers produce 30 tonnes of wheat each they produce a total of 300 million
tonnes, which is the horizontal intercept of the production possibilities frontier. Since the
tradeoff between cars and wheat is always the same, the production possibilities frontier
is a straight line.

If Canada chooses to consume 10 million cars, it will need 5 million workers devoted to
car production. That leaves 5 million workers to produce wheat, who will produce a total
of 150 million tonnes (5 million workers times 30 tonnes per worker). This is shown as
point A on Figure 4.

c. If the United States buys 10 million cars from Canada and Canada continues to consume
10 million cars, then Canada will need to produce a total of 20 million cars. So Canada
will be producing at the vertical intercept of the production possibilities frontier. But if
Canada gets 20 tonnes of wheat per car it will be able to consume 200 million tonnes of
wheat, along with the 10 million cars. This is shown as point B in the figure. Canada
should accept the deal because it gets the same number of cars and 50 million more
tonnes of wheat.

Copyright © 2017 Nelson Education Ltd.

26 • Chapter 3: Interdependence and the Gains from Trade

Wheat (millions of tonnes)

Figure 4

5. England and Scotland both produce scones and sweaters. Suppose that an English
worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker
can produce 40 scones per hour or 2 sweaters per hour.
a. Which country has the absolute advantage in the production of each good? Which
country has the comparative advantage?
b. If England and Scotland decide to trade, which commodity will Scotland trade to
England? Explain.
c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain
from trade? Would England still gain from trade? Explain.

a. English workers have an absolute advantage over Scottish workers in producing scones,
since English workers produce more scones per hour (50 vs. 40). Scottish workers have
an absolute advantage over English workers in producing sweaters, since Scottish
workers produce more sweaters per hour (2 vs. 1). Comparative advantage runs the
same way. English workers, who have an opportunity cost of 1/50 sweater per scone (1
sweater per hour divided by 50 scones per hour), have a comparative advantage in
scone production over Scottish workers, who have an opportunity cost of 1/20 sweater
per scone (2 sweaters per hour divided by 40 scones per hour). Scottish workers, who
have an opportunity cost of 20 scones per sweater (40 scones per hour divided by 2
sweaters per hour), have a comparative advantage in sweater production over English
workers, who have an opportunity cost of 50 scones per sweater (50 scones per hour
divided by 1 sweater per hour).

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 27

b. If England and Scotland decide to trade, Scotland will produce sweaters and trade them
for scones produced in England. A trade with a price between 20 and 50 scones per
sweater will benefit both countries, as they'll be getting the traded good at a lower price
than their opportunity cost of producing the good in their own country.

c. Even if a Scottish worker produced just 1 sweater per hour the countries would still gain
from trade, because Scotland would still have a comparative advantage in producing
sweaters. Its opportunity cost for sweaters would be higher than before (40 scones per
sweater, instead of 20 scones per sweater before). But there are still gains from trade
since England has a higher opportunity cost (50 scones per sweater).

6. The following table describes the production possibilities of two cities:

Red Sweaters per Worker Blue Sweaters per

per Hour Worker per Hour
Montreal 3 3
Toronto 2 1

a. Without trade, what is the price of blue sweaters (in terms of red sweaters) in Montreal?
What is the price in Toronto?
b. Which city has an absolute advantage in the production of each colour of sweater? Which
city has a comparative advantage in the production of each colour of sweater?
c. If the cities trade with each other, which colour of sweater will each export?
d. What is the range of prices at which trade can occur?

a. With no trade, the price of 1 blue sweater is 1 red sweater since productivity is the same
for the two sweaters. The price in Toronto is 2 red sweaters for 1 blue sweater.

b. Montreal has an absolute advantage in the production of both colours of sweater, since a
worker in Montreal produces more (3 sweaters per hour) than a worker in Toronto (2 red
sweaters per hour or 1 blue sweater per hour).

Toronto has a comparative advantage in producing red sweaters, since the opportunity
cost of producing red sweaters in Toronto is 1/2 of a blue sweater while the opportunity
cost of producing a red sweater in Montreal is 1 blue sweater. Montreal has a
comparative advantage in producing blue sweaters, since the opportunity cost of
producing a blue sweater in Montreal is 1 red sweater while the opportunity cost of
producing a blue sweater in Toronto is 2 red sweaters.

c. If they trade sweaters, Montreal will produce blue sweaters for export, since it has the
comparative advantage in blue sweaters, while Toronto produces red sweaters for
export, which is Toronto’s comparative advantage.

d. Trade can occur at any price between 1 and 2 red sweaters per blue sw eater. At a price
lower than 1 red sweater per blue sweater Montreal will choose to produce its own red
sweaters (at a cost of 1 red sweater per blue sweater) instead of buying them from
Toronto. At a price higher than 2 red sweaters per blue sweater Toronto will choose to
produce its own blue sweaters (at a cost of 2 red sweaters per blue sweater) instead of
buying them from Montreal.

Copyright © 2017 Nelson Education Ltd.

28 • Chapter 3: Interdependence and the Gains from Trade

7. Are the following statements true or false? Explain in each case.

a. “Two countries can achieve gains from trade even if one of the countries has an
absolute advantage in the production of all goods.”
b. “Certain very talented people have a comparative advantage in everything they do.”
c. “If a certain trade is good for one person, it can’t be good for the other one.”
d. “If a certain trade is good for one person, it is always good for the other one.”
e. “If trade is good for a country, it must be good for everyone in the country.”

a. True; two countries can achieve gains from trade even if one of the countries has an
absolute advantage in the production of all goods. All that’s necessary is that each
country has a comparative advantage in some good.

b. False; it is not true that some people have a comparative advantage in everything they
do. In fact, no one can have a comparative advantage in everything. Comparative
advantage reflects the opportunity cost of one good or activity in terms of another. If you
have a comparative advantage in one thing, you must have a comparative disadvantage
in the other thing.

c. False; it is not true that if a trade is good for one person, it can’t be good for the other
one. Trades can and do benefit both sidesespecially trades based on comparative
advantage. If both sides didn't benefit, trades would never occur.

d. True. If a trade were not good for both persons it wouldn’t take place.

e. False. Trade liberalization may hurt some people in import-competing industries. Trade
liberalization may make some people lose their jobs or some business owners see their
profits diminished. Overall, though, a country benefits from lower prices and more
diversity of imported goods.

8. Canada exports oil and pulp and paper to the rest of the world, and it imports computers and
clothing from the rest of the world. Do you think this pattern of trade is consistent with the
principle of comparative advantage? Why or why not?

Yes, this trade pattern is consistent with comparative advantage because oil and wood are
abundant in Canada. This has determined Canadian producers to become more efficient than
foreigners in extracting oil and producing pulp and paper, while having less time left for learning
how to produce good computers and clothing.

9. Conrad and Barbara produce food and clothing. In an hour, Conrad can produce 1 unit of food or
1 unit of clothing, while Barbara can produce 2 units of food or 3 units of clothing. They each
work 10 hours a day.
a. Who has an absolute advantage in producing food? Who has an absolute advantage in
producing clothing? Explain.
b. Who has a comparative advantage in producing food? Who has a comparative
advantage in producing clothing? Explain.
c. Draw the production possibilities frontier for the household (that is, Conrad and
Barbara together) assuming that each spends the same number of hours each day as
the other producing food and clothing.
d. Barbara suggests that, instead, she specialize in making clothing. That is, she will do
all of the clothing production, unless her time is fully devoted to clothing, and then
Conrad will chip in. What does the household production possibilities frontier look like
now?

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 29

e. Conrad suggests that Barbara specialize in producing food. That is, Barbara will do all
the food production, unless her time is fully devoted to food, and then Conrad will chip
in. What does the household production possibilities frontier look like under Conrad’s
proposal?
f. Comparing your answers to parts (c), (d), and (e), which allocation of time makes the
most sense? Relate your answer to the theory of comparative advantage.

a. Barbara has an absolute advantage in the production of both food and clothing because
she can produce more of each in an hour than Conrad.

b. Conrad has a comparative advantage in the production of food: His opportunity cost of
producing 1 unit of food is 1 unit of clothing, while Barbara’s opportunity cost of
producing 1 unit of food is 3/2 = 1.5 units of clothing. By the reversed logic, Barbara has
a comparative advantage in the production of clothing.

c. The two spend equal amounts of time on both activities:

Food

30

15

Clothing
20 40

Figure 5

d. Barbara does the clothing: Figure 6 shows both production possibilities frontiers and their
combination. As the graph shows, Barbara does all the clothing and some food when
they want to do fewer than 30 units of clothing. If they want to produce more than 30
units of clothing, Barbara does only clothing, while Conrad does some food and some
clothing. For example, suppose they want to produce 15 units of clothing and food for
the remaining time. Barbara will work 5 hours to produce the 15 units of clothing, and 5
hours to produce 5 × 2 = 10 units of food; in the meantime, Conrad will work 10 hours
only on food, producing 10 units of food. The result is 15 units of clothing and 10 + 10 =
20 units of food.

Copyright © 2017 Nelson Education Ltd.

30 • Chapter 3: Interdependence and the Gains from Trade

Food

30
Barbara and Conrad

20
Barbara

10 d
Conrad
Clothing
10 15 30 40

Figure 6

e. If Barbara does the food and Conrad the clothing, Barbara will produce only food if the
desired quantity is less than or equal to 20 units, the maximum Barbara can produce in
10 hours. At 20 units of food, the most clothing that can be produced is how much
Conrad can produce in 10 hours, which is 10 units. If they want more than 10 units of
clothing, then Barbara should produce correspondingly less food and help Conrad do
more clothing. Figure 7 shows this arrangement.

Food

30

Barbara and Conrad

20
Barbara
10
Conrad
Clothing
10 20 30 40

Figure 7

f. The most efficient allocation is the one at point d, with Barbara specializing in clothing
and Conrad in food. Thus, typically Barbara does all the clothing and some food, while
Conrad does only food and occasionally, when not too much food is needed, he does
some clothing. This is consistent with the theory of comparative advantage, which
predicts that the person having comparative advantage specializes in the production of
that good, but the other person can also contribute to the total production.

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 31

10. Suppose that in a year a Canadian worker can produce 100 shirts or 20 computers, while a
Chinese worker can produce 100 shirts or 10 computers.
a. Graph the production possibilities curve for the two countries. Suppose that without
trade the workers in each country spend half their time producing each good. Identify
this point in your graph.
b. If these countries were open to trade, which country would export shirts? Give a
specific numerical example and show it on your graph. Which country would benefit
from trade? Explain.
c. Explain at what price of computers (in terms of shirts) the two countries might trade.
d. Suppose that China catches up with Canadian productivity so that a Chinese worker
can produce 100 shirts or 20 computers. What pattern of trade would you predict
now? How does this advance in Chinese productivity affect the economic well-being of
the citizens of the two countries?

a. If the two countries devote half of their time to produce both goods, they produce a total
of 100 shirts and 15 computers. This is point A in Figure 8.

Shirts

A
100

Canada
China
Computers
10 15 20

Figure 8

b. China’s cost of producing a computer is 100/10 = 10 shirts. Canada’s cost is 100/20 = 5

shirts. China has a comparative advantage in the production of shirts. Starting at point
A’, the initial production and consumption point, if China produces 20 extra shirts and 2
fewer computers, it can buy from Canada up to 4 computers, thus ending up consuming
the same number of shirts as before, but up to 2 more computers. Canada would have to
produce up to 4 computers to sell to China, which costs it up to 20 shirts. Thus, China
gains some additional computers and Canada some additional shirts. The new
consumption points are B’ for China and B’’ for Canada (Figure 9).

Copyright © 2017 Nelson Education Ltd.

32 • Chapter 3: Interdependence and the Gains from Trade

Shirts

100

B’’
B’
50
A’
China Canada

Computers
5 10 20

Figure 9

c. Trade can take place at any price between the costs of production in each country. The
cost of a computer in China is 100/10 = 10 shirts; the cost of a computer in Canada is
100/20 = 5 shirts. Thus, any price between 5 and 10 shirts allows for trade.

d. With increased productivity in the computer sector, the Chinese can now consume the
same number of shirts as before and more computers. Therefore, they must be better
off. Canadians see now the price of their shirts increasing, so they must be worse off
than before. Since the two countries are now identical in terms of productivity, trade
based on comparative advantage in the two sectors does not benefit them.

11. An average worker in Brazil can produce 30 mL of soy milk in 20 minutes and 30 mL of coffee in
60 minutes, while an average worker in Peru can produce 30 mL of soy milk in 50 minutes and
30 mL of coffee in 75 minutes.
a. Who has the absolute advantage in coffee? Explain.
b. Who has the comparative advantage in coffee? Explain.
c. If the two countries specialize and trade with each other, who will import coffee?
Explain.
d. Assume that the two countries trade and that the country importing coffee trades 60
mL of soy milk for 30 mL of coffee. Explain why both countries will benefit from this
trade.

a. Brazil can produce each of the two commodities in less time than Peru. Brazil has,
therefore, an absolute advantage in both commodities.

b. In Brazil, it takes longer to produce coffee than soy. Thus, the cost of soy should be less
than an ounce of coffee. This cost is precisely 20/60 = 1/3 mL of coffee/mL of soy. In
Peru, the same price is 50/75 = 2/3 coffee/soy. Since the (opportunity) cost of producing
soy is greater in Peru, Brazil has a comparative advantage in soy and Peru in coffee.

c. Brazil will specialize in the production of soy, therefore it imports coffee.

Copyright © 2017 Nelson Education Limited

 Chapter 3: Interdependence and the Gains from Trade • 33

d. The cost of a mL of coffee in Brazil is 3 mL of soy. By importing it at only 2 mL of soy per

mL of coffee, Brazil gains 1 mL of soy for each mL of coffee imported. The cost of coffee
in Peru is 3/2 = 1.5 mL of soy per mL of coffee. By exporting it at 2 mL of soy per 1 mL
of coffee, Peru gains 0.5 mL of soy for each mL of coffee exported.

12. A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine. A
French worker takes 600 hours to produce a car and X hours to produce a case of wine.
a. For what values of X will gains from trade be possible? Explain.
b. For what values of X will Germany export cars and import wine? Explain.

a. Gains from trade will be possible when X does not equal 3. Gains from trade are possible
when a comparative advantage exists. The opportunity cost of 1 car in Germany is 200
cases of wine (400 hours/2 hours per case of wine). Likewise, the opportunity cost of 1
case of wine in Germany is 1/200 car. When X = 3, the opportunity cost of 1 car in
France is 200 cases of wine (600 hours/3 hours per case of wine). In this instance,
neither country has a comparative advantage. At all other values of X , a comparative
advantage will exist.

b. Germany will export cars and import wine for all values of X < 3. For Germany to export
cars, it must have the comparative advantage in producing cars and France must have
the comparative advantage in producing wine. This occurs when Germany has a smaller
opportunity cost of producing cars than France does. We know the opportunity cost of 1
car in Germany is 200 cases of wine. When X < 3, the opportunity cost of 1 car in France
is greater than 200 cases of wine. For example, when X = 2, the opportunity cost of 1
car in France is 300 cases of wine (600 hours/2 hours per case = 300 cases). Therefore
Germany, having the comparative advantage in cars, will export cars and import wine for
all values of X < 3.

Copyright © 2017 Nelson Education Ltd.