Use the following scenario to answer the next two questions:
Suppose that Canada, an industrialized nation, and Mexico, a developing nation, both produce clothes and cars. The real wage in Mexico is lower than in Canada. The countries have a free trade agreement. Each nation will find a comparative advantage.
-A has a comparative advantage over B in producing a good if:

Question

Quizplus · Accepted Answer

A comparative advantage exists when a country can produce a good at a lower opportunity cost than another country. Therefore, the country with the lower opportunity cost of producing a good has a comparative advantage.

Answer: Mexico has a comparative advantage in producing clothes.
 Since Mexico has a lower real wage, it implies that labor is cheaper in Mexico than in Canada. Therefore, Mexico has a comparative advantage in producing a labor-intensive good like clothes, which requires more labor than capital. On the other hand, Canada has a comparative advantage in producing capital-intensive goods like cars, where labor is less of a constraint compared to capital. Thus, both countries will specialize in producing the good that they have a comparative advantage in to maximize overall production and trade with each other.

Use the Following Scenario to Answer the Next Two Questions