Canada and the United States can produce two goods, xylophones and yogourt. Each good can be produced with labour alone. Canada requires 60 hours to produce a ton of yogourt and 6 hours to produce a xylophone. The United States requires 40 hours to produce the ton of yogourt and 5 hours to produce a xylophone.
(a) Describe the state of absolute advantage between these economies in producing goods.
(b) In which good does Canada have a comparative advantage? Does this mean the United States has a comparative advantage in the other good?
(c) Draw the production possibility frontier for each economy to scale on a diagram, assuming that each economy has an endowment of 240 hours of labour.
(d) On the same diagram, draw Canada's consumption possibility frontier on the assumption that it can trade with the United States at the United States rate of transformation.
(e) Draw the US consumption possibility frontier under the assumption that it can trade at Canada's rate of transformation.