1. Explain the concepts of Comparative and Absolute Advantage.

Suppose the USA and Canada are considering to trade. Assume there are only two goods in the economy: wheat and corn. The table below illustrates what each country can produce in a given year.

Wheat Corn

USA 4 2

Canada 5 8

In this case, which country should produce wheat? Why? Hint: calculate the opportunity cost for each country. For instance, USA can produce 4 units of wheat OR 2 units of Corn. In this case, if the USA produces one unit of corn, then it has to give up 2 units of wheat. Be sure to review the handout for this module. You can also check out another example by clicking here.

2. Explain how does trade affect the production possibilities frontier? Explain.

3. Illustrate what other factors can expand the production possibilites frontier. Explain.

4. Give an argument for or against trade. Explain your reasons. Be sure to support your answer.