It is false both nations will benefit if the terms of trade are 1 peanut = 3 corn.
What is the comparative advantage?
The comparative advantage refers to the ability of one company or nation to produce something at a lower cost. In this case, the U.S. can produce peanuts at a lower cost than Canada.
Will both nations benefit if they trade 1 peanut for 3 corn?
No, due to their differences in the amounts of units produced and their comparative advantage both nations will not benefit from this trade.
- Canada: Canada can produce 60 corn for every 20 peanuts, this can be understood as a 1 peanut : 3 corn ratio, therefore, this country will benefit from the 1 peanut = 3 corn term.
- United States: The United States produces 60 corn for every 60 peanuts or 1 peanut: 1 corn. Due to this, they will not benefit from the trade because this nation does not produce enough corn to meet the demand of 1 peanut = 3 corn.
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