Question

Suppose that the opportunity cost of producing a personal computer in the U.S. is one large screen television. In Canada, the opportunity cost of a large screen television is two personal computers. Should trade take place? If so, which good should each country produce?

A. We don't know without knowing the absolute or comparative advantage.
B. No, trade should not take place.
C. Yes, Canada should produce computers; the U.S. should produce TVs.
D. Yes, Canada should produce TVs; the U.S. should produce computers.

Answer 1

Trade should take place between the U.S. and Canada based on comparative advantage. The U.S. has a lower opportunity cost for producing TVs and should specialize in TVs, whereas Canada has a lower opportunity cost for producing PCs and should specialize in PCs.

option c is the correct

Step-by-step explanation:

When considering whether trade should take place and which good each country should produce, we look at the opportunity cost and comparative advantage.

Given that the opportunity cost of producing a personal computer in the U.S. is one large screen television, and in Canada, the opportunity cost of a large screen television is two personal computers, we can determine comparative advantage. The U.S. has to give up one TV for a PC, whereas Canada has to give up two PCs for one TV. Therefore, the U.S. has a lower opportunity cost for TVs, and Canada has a lower opportunity cost for PCs.

To further explain, for the United States, producing one more TV means losing out on one PC, and for Canada, producing one more TV means losing out on two PCs. Consequently, on the concept of comparative advantage, the U.S. should specialize in producing TVs (since it gives up less for each TV produced compared to Canada), and Canada should specialize in producing computers. This means that trade should take place: Canada should produce computers, and the U.S. should produce TVs. Therefore, the correct answer is C: Yes, Canada should produce computers; the U.S. should produce TVs.