Problem: Suppose the USA and Canada are considering to trade. Assume there are only two goods in the economy: potatoes and rice. The table below illustrates what each country can produce in a given year.
Potatoes Rice
USA 8 4
Canada 10 16
Question 1. In this case, which country should produce potatoes? Why? Hint: calculate the opportunity cost for each country. For instance, USA can produce 8 units of potatoes OR 4 units of rice. In this case, if the USA produces one unit of rice, then it has to give up 2 units of potatoes
Question 2. How does trade affect the production possibilities frontier?
Question 3. Give 5 factors that can expand the production possibilities frontier.