Question

COFFEE (Milions of pounds) 3 COFFEE (Millions of pounds)

Answer 1

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Freedonia;

32 million pounds of potatoes = 48 million pounds of coffee

1 pound of potato = 48/32 = 1.5 pound of coffee

1 pound of coffee = 32/48 = 0.67 pound of potato

Sylvania;

48 million pounds of potatoes = 24 million pounds of coffee

1 pound of potato = 24/48 = 0.5 pound of coffee

1 pound of coffee = 48/24 = 2 pound of potato

Freedonia has comparative advantage in the production of coffee because of lower opportunity cost.

Sylvania has comparative advantage in the production of potato because of lower opportunity cost.

After specialisation, Freedonia will produce only coffee while Sylvania produce only potatoes.

Coffee production by Freedonia = 48 million pounds

Potatoes production by Sylvania = 48 million pounds

After Trade;

Freedonia: Coffee = 48 - 16 = 32 million pounds and Potatoes = 0 + 16 million = 16 million pounds

Sylvania: Coffee = 0 + 16 = 16 million pounds and Potatoes = 48 - 16 = 32 million pounds

.

True, without trade countries are able to consume bundles which lies on or below PPF.