Below is a table showing the daily production numbers for 1

Below is a table showing the daily production numbers for 1 worker in both Mexico and Canada. Use these numbers to answer the questions below.

1 worker in Mexico can produce in 1 day

1 worker in Canada can produce in 1 day

2 sodas or 12 pizzas

3 sodas or 24 pizzas

1. Determine a trade agreement for 1 pizza (price in terms of x number of sodas for 1 pizza) that both countries would benefit from. (Do not give me a range of prices. Just give me 1 price and 1 price only.) (Hint: who will be buying and who will be selling pizzas?)

2. Explain (using numbers) how Canada would benefit from your answer to (i) above.

3. Explain (using numbers) how Mexico would benefit from your answer to (i) above.

Solution

Table of production

Countries

1 worker in 1 day

Soda

Pizza

Country M

2

12

Country C

3

24

1.

Trade agreement for 1 pizza could be solved through comparative advantage.

Comparative advantage: This is the comparison between the two countries, of which one country has lower opportunity cost than other.

Opportunity costs are given below:

Country M

12/2 = 6

2/12 = 0.167

Country C

24/3 = 8

3/24 = 0.125

Lower opportunity cost of producing 1 pizza is in the country C, since 0.125 < 0.167. Therefore, M will be buying and C will be selling pizza.

Lower opportunity cost of producing 1 soda is in the country M, since 6 < 8. Therefore, C will be buying and M will be selling soda.

2.

The country C could be benefited by producing more number of pizzas, since it is their specialized area of working.

3.

The country M could be benefited by producing more number of sodas, since it is their specialized area of working.