H. Youngelson-Neal

CLASS EXERCISE I

COMPARATIVE ADVANTAGE

There are two countries, Canada and the United States, each producing two commodities, newsprint and corn with one factor of production, labor. The following table shows the labor productivity in each country for producing both commodities.

TABLE l .

COUNTRY	CORN	NEWSPRINT
	(tons per hr.)	(tons. per hr)
CANADA	2	4
U.S.	8	4

Assuming Canada and the United States each has a population of 200 hours of labor, answer the following questions based on the information given in Table 1.

A. BEFORE TRADE:

1. If Canada uses all of its labor hours producing corn, it can produce _____ tons of corn; if, instead, Canada uses all of its labor hours producing newsprint, it can produce _____ tons of newsprint.

2, In Canada, 1 ton of corn can be exchanged for ____ tons of newsprint; 1 ton of newsprint can be exchanged for _____ 1 ton of corn.

3. If Canada wishes to produce and consume 300 tons of newsprint, it would use _____ labor hours producing newsprint production. Canada has ______ labor hours left to use producing corn, producing and consuming ____ tons of corn.

4. If the United States uses all of its labor hours producing corn, it can produce _____ tons of corn; if, instead, all of its labor hours producing newsprint, it can produce _____ tons of newsprint.

5. In the United States, 1 ton of corn could be exchanged for ______ tons of newsprint; 1 ton of newsprint could be exchanged for _____ 1 ton of corn.

6. If the United States wishes to produce and consume 1000 tons of corn, it would use _____ labor hours producing corn. The United States has ______ labor hours left to use producing newsprint, producing and consuming ____ tons of newsprint.

B. AFTER TRADE:

Based upon the demand and supply conditions for each other's commodities given in the Table 2 below, answer the following questions:

TABLE 2

CANADA UNITED STATES___

POSSIBLE T/T Quantity X's Quantity Ms Quantity X's Quantity Ms

1C= 1/2 NP (1NP= 2 C)	0	0	900	450
1C= 2/3 NP (1NP =1 3/2C	240	360	630	420
1C = 1 NP (1NP = 1C)	400	400	400	400
1C=1 1/2 NP (1NP= 2/3 NP)	675	450	200	300
1C= 2 NP (1NP =1/2 C)	1000	500	0	o

* C is CORN; NP is newsprint

1. The equilibrium terms of trade is ______________.

2. Canada has a comparative advantage in the production of ______________; exporting _____________ and importing ____________.

3. Canada produces ___________ tons of corn, and _____________ _________ tons of newsprint; domestically consuming ________ tons newsprint and ________ tons of corn.

4. Canada exports _________ (tons of newsprint/tons of wheat) and imports ______________ (tons of newsprint /tons of corn)

5. The United States has a comparative advantage in the production of __________; exporting _____________ and importing ____________.

6. The United States produces ___________tons of newsprint and _____________ _________ tons of corn; domestically consuming ________ tons of newsprint and ________ tons of corn.

8. The United States exports _________ (tons of newsprint/tons of corn) and imports ______________ (tons of newsprint/tons of corn.

9 In the situation above, the gains from trade are divided (equally/unequally) with Canada gaining ________ tons of newsprint and ______ tons of corn; and the United States gaining _______ tons of newsprint and ________ tons of corn.

10. Draw the graphs for the United States and Canada showing their production and consumption before and after trade.

11. If the gains are not equally divided between Canada and the United states, does it still pay for Canada and the United States trade with each other? Explain.