Freedonia has a comparative advantage in the production of while Desonia has a comparative advantage in the production of Suppose that Freedonia 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 potatoes and million pounds of tea.
Freedonia has a comparative advantage in the production of while Desonia has a comparative advantage in the production of Suppose that Freedonia 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 potatoes and million pounds of tea.
Chapter1: Making Economics Decisions
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Transcribed Image Text:48
30
TEA (Millions of pounds)
42
SI
30
24
12
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 Freedonia and Desonia. Both countries produce potatoes and tea, each
initially (i.e., before specialization and trade) producing 18 million pounds of potatoes and 9 million pounds of tea, as indicated by the grey stars
marked with the letter A.
Freedonia
Desonia
48
48
42
PPF
24
18
PPF
18
12
A
9.
9.
12
18
24
48
12
18
24
42
9.
POTATOES (Millions of pounds)
POTATOES (Millions of pounds)
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Transcribed Image Text:oð 7
B.
38
SI
30
24
illions of pounds)
Freedonia has a comparative advantage in the production of
while Desonia has a comparative advantage in the
production of
Suppose that Freedonia 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 potatoes and
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of tea.
Suppose that Freedonia 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 12 million pounds of potatoes for 12 million pounds of tea. This ratio of goods is known as the price of
trade between Freedonia and Desonia,
The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the
graph to indicate Freedonia's consumption after trade.
Note: Dashed drop lines will automatically extend to both axes.
Freedonia
48
42
Consumption After Trade
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