In the figure given below AB is the production-possibility curve of Canada. In the absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line PQ. The international price ratio is 0.25 bushels of wheat/bale of cotton as shown by the line RS. I₁and I₂ are the pre-trade and the post trade community indifference curves of Canada respectively. Which of the following can be inferred from this figure? A)Canada has a comparative advantage in the production of wheat. B)Canada has a comparative advantage in the production of cotton. C)Canada has an absolute disadvantage in the production of both the goods. D)Canada has absolute advantage in the production of both the goods.

Question

Quizplus · Accepted Answer

In the absence of trade, the price ratio is 1 bushel of wheat/bale of cotton as shown by the line PQ, and it intersects with the production-possibility curve AB at point U1. This means that Canada is producing an equal amount of both goods, and it is not taking advantage of any comparative advantage. However, with international trade, the price ratio becomes 0.25 bushels of wheat/bale of cotton as shown by the line RS. The new equilibrium point is U2, where Canada is producing more wheat and less cotton, as it has a comparative advantage in the production of wheat. This is reflected in the post-trade community indifference curve I₂, which is above the pre-trade indifference curve I₁, indicating that Canada is better off after trade. Therefore, the answer is A) Canada has a comparative advantage in the production of wheat.

In the Figure Given Below AB Is the Production-Possibility Curve