Suppose that in the US, a unit of labour produces 4 units of Clothing, and a unit of labour produces 4 units of Food. In Canada, a unit of labour produces 2 units of clothing, and a unit of labour produces 5 units of food.

a) For each good, which country has an absolute advantage?

b) For each good, which country has the comparative advantage?

c) Assuming that 40 hours of labour are available in each country, draw the production possibilities frontier for each country.

d) What are the autarky price ratios?

e) Suppose the world price ratio is between the two price ratios, can you tell what the relative wages are?

f) Draw the world production possibilities frontier and explain what goods are being produced at each point.

g) What range of prices is possible if one good is produced in each country?

h) Suppose each country produces the good in which it does not have a comparative advantage. How much is output reduced in each industry?