1. (20 points) Suppose Australia and Canada are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs: Table 1. Production of Wheat or Rice in Australia and South Korea. The Opportunity Costs of producing one product or the other are displayed. 1000's of Tons off Wheat Bushels Rice Nation Produced or Produced Australia 90 or 60 South Korea 25 or 45 a) Which nation has the comparative advantage in producing Wheat? Which nation has the comparative advantage in producing Rice? Explain how you arrived at these conclusions. b) Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Wheat and which nation should specialize in producing Rice, and why? c) Suppose a trade proposal is made to exchange 1 thousand Bushels of Wheat for 1.2 tons of Rice. Would these terms-of-trade (1 Wheat : 1.20 Rice ) be acceptable to, and mutually beneficial for both Australia and South Korea as trading partners? Why or why not? d) What are the "payoffs" from open trade? What are some of the limitations associated with open trade? P W m