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

To determine which country should produce wheat, we need to calculate the opportunity cost for each country. Opportunity cost represents the value of the next best alternative that is given up when making a choice.

Let's start with the USA. According to the table, the USA can produce either 4 units of wheat OR 2 units of corn. If the USA chooses to produce one unit of corn, it would have to give up 2 units of wheat. This means that the opportunity cost of producing one unit of corn for the USA is 2 units of wheat.

Now let's look at Canada. According to the table, Canada can produce either 5 units of wheat OR 8 units of corn. If Canada chooses to produce one unit of corn, it would have to give up 5/8 units of wheat. Simplifying this, the opportunity cost of producing one unit of corn for Canada is 5/8 units of wheat.

Comparing the opportunity costs, we can see that for the USA, the opportunity cost of producing one unit of corn is 2 units of wheat, while for Canada, the opportunity cost of producing one unit of corn is 5/8 units of wheat.

Since the USA has a lower opportunity cost for producing corn, it should specialize in corn production. Therefore, the USA should produce corn, and as a result, Canada should specialize in wheat production.