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 Yosemite and Denali. Both countries produce peas and pistachios, each initially (i.e., before specialization and trade) producing 24 million pounds of peas and 12 million pounds of pistachios, as indicated by the grey stars marked with the letter A. PISTACHIOS (Millions of pounds) 64 56 48 PPF 40 32 24 16 8 0 ▬▬▬▬▬▬▬▬ 08 Yosemite 24, 12 16 24 32 40 48 PEAS (Millions of pounds) 56 64 ? PISTACHIOS (Millions of pounds) 64 56 48 40 32 24 16 8 0 0 PPF 8 1 Denali 16 24 32 40 48 PEAS (Millions of pounds) 56 64 ? Yosemite has a comparative advantage in the production of , while Denali has a comparative advantage in the production of Suppose that Yosemite and Denali 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 pistachios and of peas. million pounds Suppose that Yosemite and Denali 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 24 million pounds of peas for 24 million pounds of pistachios. This ratio of goods is known as the price of trade between Yosemite and Denali.
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 Yosemite and Denali. Both countries produce peas and pistachios, each initially (i.e., before specialization and trade) producing 24 million pounds of peas and 12 million pounds of pistachios, as indicated by the grey stars marked with the letter A. PISTACHIOS (Millions of pounds) 64 56 48 PPF 40 32 24 16 8 0 ▬▬▬▬▬▬▬▬ 08 Yosemite 24, 12 16 24 32 40 48 PEAS (Millions of pounds) 56 64 ? PISTACHIOS (Millions of pounds) 64 56 48 40 32 24 16 8 0 0 PPF 8 1 Denali 16 24 32 40 48 PEAS (Millions of pounds) 56 64 ? Yosemite has a comparative advantage in the production of , while Denali has a comparative advantage in the production of Suppose that Yosemite and Denali 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 pistachios and of peas. million pounds Suppose that Yosemite and Denali 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 24 million pounds of peas for 24 million pounds of pistachios. This ratio of goods is known as the price of trade between Yosemite and Denali.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 Yosemite and Denali. Both countries produce peas and pistachios, each
initially (i.e., before specialization and trade) producing 24 million pounds of peas and 12 million pounds of pistachios, as indicated by the grey stars
marked with the letter A.
PISTACHIOS (Millions of pounds)
64
56
48
40
32
24
16
8
0
0
PPF
8
Yosemite
24, 12
16 24 32 40 48
PEAS (Millions of pounds)
56
64
?
PISTACHIOS (Millions of pounds)
64
56
48
40
32
24
16
8
0
0
PPF
8
Denali
16
24 32 40 48
PEAS (Millions of pounds)
56 64
Yosemite has a comparative advantage in the production of
while Denali has a comparative advantage in the
production of
. Suppose that Yosemite and Denali 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 pistachios and
million pounds
of peas.
Suppose that Yosemite and Denali 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 24 million pounds of peas for 24 million pounds of pistachios. This ratio of goods is known as the price
of trade between Yosemite and Denali.
Transcribed Image Text:The following graph shows the same PPF for Yosemite as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the
graph to indicate Yosemite's consumption after trade.
Note: Dashed drop lines will automatically extend to both axes.
PISTACHIOS (Millions of pounds)
64
56
48 PPF
40
32
16
8
0
0
PISTACHIOS (Millions of pounds)
64
56
32
24 PPF
16
8
0
8
As you did for Yosemite, place a black point (plus symbol) on the following graph to indicate Denali's consumption after trade.
0
True
16
8
O False
Yosemite
24
32
40
PEAS (Millions of pounds)
16
48
Denali
24
32
40
PEAS (Millions of pounds)
56
48
64
56
Consumption After Trade
64
(?)
Consumption After Trade
True or False: Without engaging in international trade, Yosemite and Denali would not have been able to consume at the after-trade consumption.
bundles. (Hint: Base this question on the answers you previously entered on this page.)
(?)
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