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7 Jan 2018

42. In Canada, the production of 1 unit of food (F) requires 1/6 of a unit of labour and the production of 1 unit of shelter (S) requires 1/8 of a unit of labour. In Morocco, the production of 1 unit of food (F) requires 1/4 of a unit of labour and the production of 1 unit of shelter (S) requires 1/2 of a unit of labour. Canada has 60 units of labour and Morocco has 60 units of labour. In the absence of trade, Canada produces and consumes 135 units of food and 300 units of shelter, and Morocco produces and consumes 80 units of food and 80 units of shelter. These two products and these two countries are the only ones in the world. When trade is opened up, the two countries trade food for shelter at a 1-to-1 ratio, and 160 units of food and 160 units of shelter are exchanged. On the diagrams provided, draw and clearly label the production possibilities curve for each country. Indicate where each country starts out before trade occurs (with a Co for Canada and a Mo for Morocco). Indicate the point at which each country produces (using a Cp for Canada and a Mp for Morocco) and the point at which each country consumes (using a C* for Canada and a M* for Morocco), and show the trading line (the consumption possibilities curve or consumption possibilities function) for each country. Label your diagram as completely as possible. Below the diagram, explain in a small number of words what is meant by "the terms of trade". How can we tell the terms of trade by looking at the graph? (10 marks)

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Sixta Kovacek
Sixta KovacekLv2
9 Jan 2018

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