Question

Suppose that Canada can produce 15units of timber or 3 units of grain. Suppose that Mexico can produce 6 units of timber or 2 units of grain. Which of the following is CORRECT?
a. Canada has a comparative advantage in grain production.
b. Mexico has a comparative advantage in grain production.
c. The countries would find trade mutually beneficial at a trading ratio of 1 grain for 2 timber.
d. Mexico has an absolute advantage in timber production.

Answer 1

Answer: B. Mexico has a comparative advantage in grain production.

Explanation:

Comparative advantage simply means when an economy can produce a good at a lower opportunity cost than another economy.

From the information given, since Canada can produce 15units of timber or 3 units of grain. Therefore, 1 grain = 15/3 = 5 timber

On the other hand, Mexico can produce 6 units of timber or 2 units of grain. Therefore, 1 grain = 6/2 = 3 timber.

Therefore, Mexico haa a comparative advantage in grain based on the above.