4. Specialization and trade When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Lamponia. Both countries produce lemons and sugar, each initially (that is, before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of sugar, as indicated by grey points (star symbols) labeled point A. 18 PPF Maldonia has a comparative advantage in the production of production of 24 advantage), the most the two countries can produce is 10 30 Maldonia PPF 30 12 10 24 30 36 42 40 LEMONS (Mons of pounds) PPF Suppose that Maldonia and Lamponia specialize and open up to international trade, and the terms of trade in the world market are 1 pound of lemons for 1 pound of sugar. That is, Maldonia is willing to sell Lamponia 1 pound of lemons in exchange for 1 pound of sugar, and Lamponia is willing to sell Maldonia 1 pound of sugar in exchange for 1 pound of lemons. The countries decide to exchange 12 million pounds of lemons for 12 million pounds of sugar. The following graph shows the same PPP for Maldonia as before, as well as its initial consumption at point A. Use the green line (triangle symbol) to plot the trading possibilities line (TPL) for Maldonia. Then place the black point (plus symbol) on the trading possibilities line to indicate Maldonia's consumption after specialization and trade. O True Maldonia False 24 30 LEMONS (Millions of pounds) ? 30 D Lamponia 0 whille Lamponia has a comparative advantage in the If each fully specializes (that is, produces only the good for which each has a comparative million pounds of lemons and million pounds of sugar PPF 24 30 30 LEMONS (Millions of pounds) LEMONS (Millions of pounds) Lamponia The following graph shows the same PPF for Lamponia as before, as well as its initial consumption at point A. As you did for Maldonia, use the green line (triangle symbol) to plot the trading possibilities line (TPL) for Lamponia. Then place the black point (plus symbol) on the trading possibilities line to indicate Lamponia's consumption after specialization and trade. ? tet TPL Consumption After Trade 41 TPL ? + Consumption After Trade True or False: Without engaging in international trade, Maldonia and Lamponia would have been able to consume at the after-trade consumption bundles. (Hint: Base your answer to this question on the answers you previously entered on this page.)