5. Efficiency in the production possibilities model Suppose Ireland produces only two goods: alfalfa and cars. The following graph shows Ireland's current production possibilities frontier (also known as the production possibilities curve), along with six output combinations represented by black points (cross symbols) labeled A to F. CARS (Millions) g 20 8 100 +o PPF X A 65, 46 X4

What is comparative advantage?

What is absolute advantage? What is comparative advantage?

Review the numbers for Canada and Venezuela from Table 33.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this ask as the relative price or trade price of lumber. Is the Canadian ask you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.