Question

 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 Maldonia and Desonia. Both countries produce potatoes and tea, each initially (i.el, before specialization and trade) producing 24 million pounds of potatoes and 12 million pounds of tea, as indicated by the grey stars marked with the letter A.

 Maldonia has a comparative advantage in the production of _______  while Desonia has a comparative advantage in the production of _______.

 Suppose that Maldonia 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 tea and _______  million pounds of potatoes.

 Suppose that Maldonia 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 24 million pounds of potatoes for 24 million pounds of tea. This ratio of goods is known as the price of trade between Maldonia and Desonia.

 The following graph shows the same PPF for Maldonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Maldonia's consumption after trade.

 Note: Dashed drop lines will automatically extend to both axes.

 The following graph shows the same PPF for Desonia as before, as well as its initial consumption at point A.

 As you did for Maldonia, place a black point (plus symbol) on the following graph to indicate Desonia's consumption after trade.

 True or False: Without engaging in international trade, Maldonia 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

•  False

Answer 1

Maldonia

1 tea = 0.67 potatoes

1 potato= 1.5 tea

Desonia

1 tea = 2 potatoes

1 potato= 0.5 tea

Since, Tea has less opportunity cost in Maldonia (0.67<2), Maldonia has comparative advantage in Tea.

Since, Potatoes has less opportunity cost in Maldonia (0.5<1.5), Desonia has comparative advantage in Potatoes.

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