Canada produces MP3 players and lumber, and the horizontal axis for Canada's production possibilities frontier represents the amount of lumber produced. Canada's borders are not initially open to trade, and the country consumes along its production possibilities frontier where the MRT and MRS equal the price ratio for the two products ($200 per 1,000 board-feet of lumber versus $100 per MP3 player). If Canada opens its borders to trade with China at world prices for the two goods ($300 per 1,000 board-feet of lumber and $100 per MP3 player), what trade pattern develops for Canada?

Question

Quizplus · Accepted Answer

With the opening of trade, Canada can benefit from specializing in the production of the good in which it has a comparative advantage. In this case, Canada has a comparative advantage in the production of lumber because its opportunity cost of producing lumber (in terms of MP3 players) is lower than China's opportunity cost. Thus, Canada will export lumber to China, and import MP3 players from China.

Canada Produces MP3 Players and Lumber, and the Horizontal Axis