Question

7. Specialization and trade When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other The following graphs show the production possibilities frontiers (PPFs) for Candonia and Lamponia. Both countries produce grain and tea, each initially i.e., before specialization and trade) producing 24 million pounds of grain and 12 million pounds of tea, as indicated by the grey stars marked with the letter A. Lamponia S6 S6 48PPF 48 32 32 24 24 PPF 16 16 0 16 24 32 404 6 64 0 16 24 32 404 6 64 GRAIN (Millins of pounds) GRAIN (Millins of pounds) Candonia has a comparative advantage in the production of production of comparative advantage. After specialization, the two countries can produce a total of grain. ▼ , while Lam ponia has a comparative advantage in the , suppose that Candonia and Lamponia specialize in the production of the goods in which each has a million pounds of tea and million pounds of 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 24 million pounds of grain for 24 million pounds of tea. This ratio of goods is known as the terms 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 (cross symbol) on the graph to indicate Candonia's consumption after trade Note: Dashed drop lines will automatically extend to both axes.

1) True

2) False

Answer 1

Blanks-

1) tea

2) grain

3) 48

4) 48

Candonia Consumption After Trade TEA (Millions of pounds) 0 8 56 64 18 24 32 40 48 GRAIN (Millions of pounds)

Lamponia Consumption After Trade TEA (Millions of pounds) 0 8 56 64 16 24 32 40 4 8 GRAIN (Millions of pounds)

TRUE