Question

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 Candonia and Sylvania. Both countries produce lemons and coffee, each initially (i.e., before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of coffee, as indicated by the grey stars marked with the letter A.

Candonia has a comparative advantage in the production of lemons, while Sylvania has a comparative advantage in the production of coffee. Suppose that Candonia 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 36 million pounds of lemons and 36 million pounds of coffee.

Suppose that Candonia 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 12 million pounds of lemons for 12 million pounds of coffee. This ratio of goods is known as the price of trade between Candonia and Sylvania.

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

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

True or False: Without engaging in international trade, Candonia 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

or

-False

Answer 1

Candonia's opportunity cost for the production of Lemons = 18/36 = 0.5 pounds of coffee.

Candonia's opportunity cost for the production of Coffee= 36/18 = 2 pound of Lemons.

Similarly,Sylvania's opportunity cost for the production of Lemons = 36/24= 1.5 pound of coffee.

Sylvania's opportunity cost for the production of coffee= 24/36= 0.67 pound of lemons.

Because Candonia has the lower opportunity in the production of lemons and Sylvania has a lower opportunity cost in the production of coffee.

This implies that Candonia has a comparative advantage in the production of Lemons , while Sylvania has a comparative advantage in the production of Coffee. 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 36 million pound of Lemons (i.e only Candonia would produce) and 36 million pound of coffee (i.e only Sylvania would produce).

Suppose that Candonia and Sylvania agree to trade. The countries decide to exchange 12 million pounds of lemons for 12 million pounds of coffee.

Then ,

		CANDONIA		SYLVANIA
		Lemons (Millions of pounds)	Coffee (Millions of pounds)	Lemons (Millions of pounds)	Coffee (Millions of pounds)
Without trade	Production and consumption	18	9	18	9
With trade	Production	36	0	0	36
	Trade	Export 12	Import 12	Import 12	Export 12
	Consumption	(36-12)=24	12	12	(36-12)=24

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

TRUE because Without engaging in international trade , Candonia and Sylvania would not have been able to consume at the after trade consumption bundles as it lies outside the PPFs.