4. Specialization and trade When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFS) for Candonia and Desonia. Both countries produce lemons and tea, each initially (i.e., before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of tea, as indicated by the grey stars marked with the letter A. Candonia Desonia 48 48 42 42 36 36 PPF 30 30 24 24 18 PPF 18 12 12 -- 6 6 12 18 24 30 36 42 48 12 18 24 30 36 42 48 LEMONS (Millions of pounds) LEMONS (Millions of pounds) Candonia has a comparative advantage in the production of while Desonia has a comparative advantage in the production of . Suppose that Candonia and Desonia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of lemons and million pounds of tea. Suppose that Candonia and Desonia agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 18 million pounds of lemons for 18 million pounds of tea. This ratio of goods is known as the price of trade between Candonia and Desonia. TEA (Millions of pounds) TEA (Millions of pounds)
4. Specialization and trade When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFS) for Candonia and Desonia. Both countries produce lemons and tea, each initially (i.e., before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of tea, as indicated by the grey stars marked with the letter A. Candonia Desonia 48 48 42 42 36 36 PPF 30 30 24 24 18 PPF 18 12 12 -- 6 6 12 18 24 30 36 42 48 12 18 24 30 36 42 48 LEMONS (Millions of pounds) LEMONS (Millions of pounds) Candonia has a comparative advantage in the production of while Desonia has a comparative advantage in the production of . Suppose that Candonia and Desonia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of lemons and million pounds of tea. Suppose that Candonia and Desonia agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 18 million pounds of lemons for 18 million pounds of tea. This ratio of goods is known as the price of trade between Candonia and Desonia. TEA (Millions of pounds) TEA (Millions of pounds)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the
graph to indicate Candonia's consumption after trade.
Note: Dashed drop lines will automatically extend to both axes.
Candonia
48
42
Consumption After Trade
36
30
24
18
PPF
12
A
6
6
12
18
24
30
36
42
48
LEMONS (Millions of pounds)
TEA (Millions of pounds)
~)
Transcribed Image Text:The following graph shows the same PPF for Desonia as before, as well as its initial consumption at point A.
As you did for Candonia, place a black point (plus symbol) on the following graph to indicate Desonia's consumption after trade.
Desonia
48
42
Consumption After Trade
36
PPF
30
24
18
12
6
12
18
24
30
36
42
48
LEMONS (Millions of pounds)
True or False: Without engaging in international trade, Candonia and Desonia would have been able to consume at the after-trade consumption
bundles. (Hint: Base this question on the answers you previously entered on this page.)
True
O False
TEA (Millions of pounds)
Transcribed Image Text:4. Specialization and trade
When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its
trading partner. Then the country will specialize in the production of this good and trade it for other goods.
The following graphs show the production possibilities frontiers (PPFS) for Candonia and Desonia. Both countries produce lemons and tea, each initially
(i.e., before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of tea, as indicated by the grey stars marked with
the letter A.
Candonia
Desonia
48
48
42
42
36
36
PPF
30
30
24
24
18
PPF
18
12
12
A
6
6
12
18
24
30
36
42
48
6
12 18
24
30
36
42
48
LEMONS (Millions of pounds)
LEMONS (Millions of pounds)
Candonia has a comparative advantage in the production of
, while Desonia has a comparative advantage in the
production of
. Suppose that Candonia and Desonia specialize in the production of the goods in which each has a
comparative advantage. After specialization, the two countries can produce a total of
million pounds of lemons and
million pounds of
tea.
Suppose that Candonia and Desonia agree to trade. Each country focuses its
urces on producing only the good in which it has a comparative
advantage. The countries decide to exchange 18 million pounds of lemons for 18 million pounds of tea. This ratio of goods is known as the price of
trade between Candonia and Desonia.
TEA (Millions of pounds)
(2)
TEA (Millions of pounds)
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