(Table) From the table, assume that Canada can produce both timber and oil at an absolute advantage compared to Mexico, yet Canada is willing to trade its timber for Mexican oil. Why might Canada be willing to focus on timber and allow Mexico to produce oil?

Question

Quizplus · Accepted Answer

Canada is willing to focus on timber and allow Mexico to produce oil because of the concept of comparative advantage. Even though Canada has an absolute advantage in both timber and oil production, it may have a lower opportunity cost in producing timber compared to oil. This means that Canada can produce timber at a lower cost than oil, and allowing Mexico to produce oil and trading for it allows for both countries to specialize in the items for which they have the lowest opportunity cost, leading to mutual benefits. It is not due to better trade routes, charity, or a desire to heavily tax the oil.

(Table) from the Table, Assume That Canada Can Produce Both