INTERNATIONAL TRADE, COMPARATIVE ADVANTAGE AND PROTECTIONISM
1. According to the table above determine which country has the absolute advantage in corn and which in soybeans. In addition, determine which country has the comparative advantage in corn and which in soybeans. Make sure to support your answer by deriving the opportunity costs of each. Ans. A producer with absolute advantage over the other in the production of a good or service is if it can produce that product using fewer resources. Therefore; Canada has absolute advantage in Corn and Mexico in Soybean. Comparative advantage is the producer with the lowest opportunity cost. Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action or the benefits you could have received by taking an alternative action.
For example, the opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.
Canada O/C for corn 8/2 = 4 soybeans Canada O/C for Soybean 8/2 = 0.25 Corns Mexico O/C for corn 2/10 = 0.2 Soybeans Mexico O/C for Soybean 10/2 = 5 Corns Canada has comparative advantage in soybean and Mexico has comparative advantage in corn.
2. According to the table above, would there be trade flows in both directions if the exchange rate were $1 = 1 peso?
Ans. The USA would gain by exporting plastic and importing pesos from Mexico. At an exchange rate of 1:1, it now only has to give up $1 worth of plastic to obtain 1 pesos, whereas before trade it had to give up $4 for 8 pesos. On the other hand the USA would not benefit from trade on paper because at the inception USA was getting a good rate on paper at $1 to 3 pesos.
3. If a lower exchange rate