Below is some hypothetical data for the countries of Canada and Mexico.(Assume that Canada has 10 million workers per month available and Mexico has 20 million. )
Canada's Production Possibilities
(Output in millions of bushels per month)
Mexico's Production Possibilities
(Output in millions of bushels per month)
Output Before Trade
(Output in millions of bushels per month)

-Refer to the information above to answer this question.If each country totally specializes according to its comparative advantage and the terms of trade are 1 bushel of beans for 1.25 bushels of rye,what will be the gains from trade?

Question

Below is some hypothetical data for the countries of Canada and Mexico.(Assume that Canada has 10 million workers per month available and Mexico has 20 million. )
Canada's Production Possibilities
(Output in millions of bushels per month)
  Mexico's Production Possibilities
(Output in millions of bushels per month)
  Output Before Trade
(Output in millions of bushels per month)
 
-Refer to the information above to answer this question.If each country totally specializes according to its comparative advantage and the terms of trade are 1 bushel of beans for 1.25 bushels of rye,what will be the gains from trade?

Quizplus · Accepted Answer

To determine the gains from trade, we need to compare the output before and after trade.

Canada can produce either 10 million bushels of rye or 100 million bushels of beans. Mexico can produce either 20 million bushels of rye or 50 million bushels of beans.

Based on comparative advantage, Canada would specialize in beans and Mexico would specialize in rye.

Canada would produce 100 million bushels of beans and Mexico would produce 20 million bushels of rye.

At a terms of trade of 1 bushel of beans for 1.25 bushels of rye, Canada would trade 40 million bushels of beans (keeping 60 million bushels) for 50 million bushels of rye.

Mexico would trade 5 million bushels of rye (keeping 15 million bushels) for 4 million bushels of beans.

After trade, Canada has 60 million bushels of rye and 60 million bushels of beans, while Mexico has 15 million bushels of rye and 46 million bushels of beans.

The gains from trade for Canada are 50 million bushels of beans (traded 40 million + 10 million kept) and 50 million bushels of rye (traded 0 + 50 million kept).

The gains from trade for Mexico are 4 million bushels of beans (traded 4 million + 42 million kept) and 10 million bushels of rye (traded 5 million + 5 million kept).

Therefore, the total gains from trade are 54 million bushels of beans and 60 million bushels of rye, which is answer choice C.

Below Is Some Hypothetical Data for the Countries of Canada