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 lemons and coffee, each initially (i.e., 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. Candonia Lamponia 24PPF 24 Session Timeou 144 P 1/27/20

Answer 1

Candoniia's opportunity cost for the production of Lemons = 48/32 = 1.5 pounds of coffee.

Candonia's opportunity cost for the production of coffee= 32/48= 0.67 pounds of lemons.

Similarly, Lamponia's opportunity cost for the production of Lemons = 24/48= 0.5 pounds of coffee

Lamponia; opprtunity cost for the production of Tea= 48/24= 2 pounds of lemons.

Because Candoniia has the lower opportunity in the production of Coffee  and Lamponia has a lower opportunity cost in the production of Lemons .

This implies that Candonia has a comparative advantage in the production of Coffee, whileLamponia has a comparative advantage in the production of Lemons. 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 Coffee (i.e only Candonia would produce) and 48 million pounds of Lemons (i.e only Lamponia would produce).

Suppose that Candonia and Lamponia agree to trade. The countries decide to exchange 16 million  pounds of lemons for 16 million pounds of coffee.

Then ,

			CANDONIA		LAMPONIA
		Lemons (Millions of pounds)	Coffee(Millions of pounds)	Lemons (Millions of pounds)	Coffee (Millions of pounds)
Without trade	Production and consumption	24	12	24	12
With trade	Production	0	48	48	0
	Trade	Import 16	Export 16	Export 16	Import 16
	Consumption	16	(48-16)=32	(48-16)=32	16

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

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