Problem
From International Economics (10th edition) Foundation of Modern Trade Theory: Comparative Advantage Chapter (2) Question No/(12)
The maximum amount of steel or aluminum that Canada and Francecan produce if they fully use all thefactors of production at their
disposal with the best technology available to them is shown(hypothetically) in Table 2.7.Steel and Aluminum Production
Canada France
Steel (tons) 500 1,200
Aluminum (tons) 1,500 800
Assume that production occurs under constant-cost conditions. On graph paper, draw the production possibilitiesschedules for Canadaand France; locate aluminum on the horizontal axis and steel on the vertical axis of each country's graph.In the absence of trade, assume thatCanada produces and consumes 600 tons of aluminum and 300 tons of Steel and that France produces and consumes 400 tons of Aluminum and 600 tons of steel. Denote these autarkypoints on each nation'sproduction possibilities schedule.
a. Determine the MRT of steel into aluminum for each nation. Accordingto the principle of comparativeadvantage, should the two nations specialize? If so, which productshould each country produce? Will the extent of specialization be complete or partial? Denote each nation's specializationpoint onits production possibilities schedule. Compared to the output of steel andaluminum that occurs in the absence of trade, does specialization yield increases in output? If so, by howmuch?
b. Within what limits will the terms of trade lie if specialization and trade occur? Suppose Canada and France agree to a terms-of-trade ratio of 1:1 (1 ton of steel = 1 ton of aluminum).Draw the terms-of-trade line in thediagram of each nation. Assuming that 500 tons of steel are traded for 500 tons of aluminum, are Canadian consumers better off as the result of trade? If so, by how much? How about French consumers?
c. Describe the trade triangles for Canada and France.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.