AGRICULTURAL ECONOMICS

1. Why Nations Trade Chapter 18

4. The U.S. is the most efficient producer of wheat while Mexico is the most efficient producer of coffee. With trade, the U.S. would specialize in wheat and exchange part of its surplus for coffee. Mexico would specialize in coffee and trade part of the surplus for wheat Page 360

5. Mexico has the absolute disadvantage in producing both goods because its productivity fell by 50% from the previous example). While the U.S. is more productive in both goods, its relative advantage is greatest in wheat (5.0>1.33). The U.S. therefore has a comparative advantage in wheat while Mexico has the least comparative disadvantage in coffee, or comparative advantage in coffee. Page 361

7. Page 364 Based upon assumption that both countries fully employ all resources, technology and specific amounts of labor per year.

8. Page 365 U.S produces 100 tons of wheat and 40 tons of coffee.

9. Page 365 U.S produces 100 tons of wheat and 40 tons of coffee. Mexico produces 32 tons of wheat and 12 tons of coffee

10. Page 366 Through trade, the U.S. specializes in wheat at point B, trades 50 tons of wheat to Mexico for 45 tons of coffee, and consumes more of both goods at point C (45 tons of coffee and 150 tons of wheat). By comparing point C with point A, we see that the U.S. has gained from trade.

11. Page 366 Mexico will specialize in coffee, producing 60 tons at point B’ and no wheat. They would trade 45 tons of coffee for 50 tons of wheat, and consumer more of both goods (50 tons of wheat and 15 tons of coffee at point C’) than it could at point A’.

13. Chapter 19 discusses trade policy and preferential trading agreements ….