Suppose in Finland a worker can produce either 32 cell phones or 4 kayaks while in Canada a worker can produce either 40 cell phones or 10 kayaks

Question

a. Which country has an absolute advantage in cell phone production? In kayak production?
b. What is the opportunity cost of 1 cell phone in Finland? In Canada?
c. What is the opportunity cost of 1 kayak in Finland? In Canada?
d. Which country has a comparative advantage in cell phone production? In kayak production?
e. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labor force to cell phone production and 60 percent to kayak production. What is the output of cell phones and kayaks for each country and what is the total output of cell phones and kayaks between the two countries?
f. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cell phones and kayaks in the two countries?
g. Provide a numerical example to show how Finland and Canada can both gain from trade. Assume that the terms of trade are established at 6 cell phones for 1 kayak.

Answer 1

a. Canada has an absolute advantage in the production of both goods.
b. In Finland, the opportunity cost of 1 cell phone = 1/8 kayak. In Canada, the opportunity cost of 1 cell phone = 1/4 kayak.
c. In Finland, the opportunity cost of 1 kayak = 8 cell phones. In Canada, the opportunity cost of 1 kayak = 4 cell phones.
d. Finland has a comparative advantage in cell phone production and Canada in kayak production.
e.
Cell Phones Kayaks
Finland 400 × 32 = 12,800 600 × 4 = 2,400
Canada 400 × 40 = 16,000 600 × 10 = 6,000
Total 28,800 8,400

f. If each country specializes, output is:
Cell Phones Kayaks
Finland 1,000 × 32 = 32,000
Canada 1,000 × 10 = 10,000
Total 32,000 10,000

g.
Finland
Output 32,000 cell phones
Exports 18,000 cell phones
Consumes 14,000 cell phones
Imports 3,000 kayaks

Canada
Output 10,000 kayaks
Exports 3,000 kayaks
Consumes 7,000 kayaks
Imports 18,000 cell phones