What is meant by the term trade triangle?
With a given level of world resources, international trade may bring about an increase in total
world output. Explain.
The maximum amount of steel or aluminum
that Canada and France can produce if they
fully use all the factors of production at their
disposal with the best technology available to
them is shown (hypothetically) in Table 2.9.
Assume that production occurs under
constant-cost conditions. On graph paper,
draw the production possibilities schedules for
Canada and France; locate aluminum on the
horizontal axis and steel on the vertical axis of
each country’s graph. In the absence of trade,
assume that Canada produces and consumes
600 tons of aluminum and 300 tons of steel
and that France produces and consumes 400
tons of aluminum and 600 tons of steel. Denote
these autarky points on each nation’s production possibilities schedule.
a. Determine the MRT of steel into aluminum
for each nation. According to the principle
of comparative advantage, should the two
nations specialize? If so, which product
should each country produce? Will the extent
of specialization be complete or partial?
Denote each nation’s specialization point on
its production possibilities schedule. Compared to the output of steel and aluminum
that occurs in the absence of trade, does specialization yield increases in output? If so, by
how much?
b. Within what limits will the terms of trade lie
if specialization and trade occur? Suppose
Canada and France agree to a terms-of-trade
ratio of 1:1 (1 ton of steel 1 ton of aluminum). Draw the terms-of-trade line in the
diagram of each nation. Assuming that 500
tons of steel are traded for 500 tons of aluminum, are Canadian consumers better off as
the result of trade? If so, by how much?
How about French consumers?
c. Describe the trade triangles for Canada and
France.