United States

Option Capital Goods Consumer Goods

A 0 800000

B 25000 600000

C 50000 400000

D 75000 200000

E 100000 0

Mexico

Option Capital Goods Consumer Goods

A 0 96000

B 4000 72000

C 8000 48000

D 12000 24000

E 16000 0

1. Which nation has a comparative advantage in the production of capital goods? Explain.
2. Which nation has a comparative advantage in the production of consumer goods? Explain.
3. What is a terms of trade ratio that will be mutually beneficial to both nations?
4. Using the terms of trade ratio you found in part c, graph the trading possibilities line for the United States on its PPC graph from question #1, making sure to clearly label the axes to show the quantities of both goods that the United States will be able to consume once it engages in trade with Mexico.

5. Which nation has an absolute advantage in the production of capital goods?

6. Which nation has an absolute advantage in the production of consumer goods?