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 Candonia and Lamponia. Both countries produce potatoes and coffee, each initially (i.e., before specialization and trade) producing 6 million pounds of potatoes and 3 million pounds of coffee, as indicated by the grey stars marked with the letter A.

 Candonia has a comparative advantage in the production of _______  , while Lamponia has a comparative advantage in the production of _______  . Suppose that Candonia and Lamponia 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 coffee.

 Suppose that Candonia and Lamponia 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 4 million pounds of potatoes for 4 million pounds of coffee. This ratio of goods is known as the price of trade between Candonia and Lamponia.

 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 trade.

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

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

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

 True or False: Without engaging in international trade, Candonia and Lamponia 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