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 Sylvania. Both countries produce grain and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of grain 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 Sylvania has a comparative advantage in the production of _______ .Suppose that Maldonia and Sylvania 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 grain and _______  million pounds of tea.

 Suppose that Maldonia and Sylvania 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 16 million pounds of grain for 16 million pounds of tea. This ratio of goods is known as the price of trade between Maldonia and Sylvania.

 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 Sylvania 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 Sylvania's consumption after trade.

 True or False: Without engaging in international trade, Maldonia and Sylvania 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.)

 True

 False

Answer 1

Maldonia's opportunity cost for the production of Grains = 24/48= 0.5 pounds of tea.

Maldonia's opportunity cost for the production of tea=48/24= 2 pounds of grains.

Similarly, Sylvania's opportunity cost for the production of Grain =  48/32 = 1.5 pounds of tea.

Sylvania's opportunity cost for the production of Tea= 32/48= 0.67 pounds of grain.

Because Maldonia has the lower opportunity in the production of grain and Sylvania has a lower opportunity cost in the production of tea.

This implies that Maldonia has a comparative advantage in the production of grain, while Sylvania has a comparative advantage in the production of tea. Suppose that both specialize in the production of the goods in which each has a comparative advantage . After specialization , the two countries can produce a total of 48 million pounds of Tea (i.e only Sylvania would produce) and 48 million pounds of Grain (i.e only Maldonia would produce).

Suppose that Maldonia and Sylvania agree to trade. The countries decide to exchange 16 million  pounds of grain for 16 million pounds of tea.

Then ,

			MALDONIA		SYLVANIA
		Grain (Millions of pounds)	Tea (Millions of pounds)	Grain (Millions of pounds)	Tea (Millions of pounds)
Without trade	Production and consumption	24	12	24	12
With trade	Production	48	0	0	48
	Trade	Export 16	Import 16	Import 16	Export 16
	Consumption	(48-16)=32	16	16	(48-16)=32

By plotting the after trade consumption points, we get the following graphs:

TRUE because without engaging in international trade ,Maldonia and Sylvania would have not been able to consume the after trade consumption point because it lies outside the PPF.