Suppose it takes a Chinese worker 2 hours to produce a ceramic pot, and 20 hours to produce a tablecloth. Suppose that it takes a Canadian worker 2 hours to produce a ceramic pot and 10 hours to produce a tablecloth. It will benefit China to produce extra pots and export them to Canada in return for imported Canadian tablecloths.

Question

Quizplus · Accepted Answer

According to comparative advantage theory, countries should specialize in producing and exporting goods in which they have a lower opportunity cost (i.e. give up less to produce them) and import goods in which they have a higher opportunity cost (i.e. give up more to produce them). In this case, China has a lower opportunity cost for producing ceramic pots (2 hours) compared to Canada (2 hours and 30 minutes), whereas Canada has a lower opportunity cost for producing tablecloths (10 hours) compared to China (20 hours). Therefore, it would benefit China to specialize in producing and exporting more ceramic pots, while importing Canadian tablecloths. This will allow both countries to gain from trade and increase overall welfare.

Suppose It Takes a Chinese Worker 2 Hours to Produce