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 Desonia. 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. Freedonia Desonia PPF TEA (Millions of pounds) TEA (Millions of pounds) PPF MA 0 0 + 8 0 56 64 + 8 0 56 64 16 24 32 40 48 GRAIN (Millions of pounds) 16 24 32 40 48 GRAIN (Millions of pounds) Freedonia has a comparative advantage in the production of , while Desonia has a comparative advantage in the production of 2. Suppose that Freedonia and Desonia 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 grain and million pounds of tea.

Answer 1

Blank 1: Grain

Blank 2: Tea

Blank 3: 48

Blank 4: 48

Freedonia Consumption After Trade TEA (Millions of pounds) 24 PPF 0 8 56 64 16 24 32 40 48 GRAIN (Millions of pounds)

Desonia Consumption After Trade 48 PPF TEA (Millions of pounds) 0 8 56 64 16 24 32 40 48 GRAIN (Millions of pounds)

Given statement is FALSE