This assignment relates to the following Course Learning Requirements:

• CLR 3: Evaluate the causes and economic costs of inflation
• CLR 4: Explain the role and functions of money in a modern economy

Discussion Questions:

1. What is absolute advantage in trade theory?
2. What is the comparative advantage on international trade?
3. How does absolute and comparative advantage lead to specialization?
4. What are the benefits of comparative advantage?

Calculations:

1. The following represents the production possibilities in the following two countries.

Canada Mexico
Good X	Good Y	Good X	Good Y
0	32	0	24
4	24	4	18
8	16	8	12
12	8	12	6
16	0	16	0

(a) Which country has a comparative advantage at producing Good X?

(b) How can you tell? (Hint: opportunity cost)

(c) Which country has a comparative advantage at producing Good Y?

(d) Indicate how both countries can gain from trade?

Use the following data to answer the followingquestions:

1. Untied States can produce either 18 oranges or 9 apples in an hour, whereas, Mexico can produce either 16 oranges or 4 apples in an hour.

2. What are the opportunity costs of producing 1 apple for United States and Mexico respectively?

3.What are the terms of trade between apples and oranges that would allow both Untied States and Mexico to gain by specialization and exchange?