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 Freedonia and Sylvania. Both countries produce lemons and coffee, each initially (i.el, before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of coffee, as indicated by the grey stars marked with the letter A.

Freedonia has a comparative advantage in the production of

[A) Lemons. B) Coffee. C)Neither lemons nor coffee. D)Both lemons and coffee]

, while Sylvania has a comparative advantage in the production of

[A) Lemons. B) Coffee. C)Neither lemons nor coffee. D)Both lemons and coffee]

. Suppose that Freedonia 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 coffee and[————] million pounds of lemons.

 Suppose that Freedonia 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 24 million pounds of lemons for 24 million pounds of coffee. This ratio of goods is known as the price of trade between Freedonia and Sylvania.

 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.

 As you did for Freedonia, 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, Freedonia and Sylvania 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