Question

- Specialization and trade "hen 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 ading partner. Then the country will specialize in the production of this good and trade it for other goods. he following graphs show the production possibilities frontiers (PPFs) for Candonia and Desonia. Both countries produce potatoes and coffee, each itially i.e., before specialization and trade) producing 6 million pounds of potatoes and 3 million pounds of coffee, as indicated by the grey stars arked with the letter A. Candonia Desonia PPF COFFEE (Millions of pounds) COFFEE (Millions of pounds) HHAHH+ PPF

Answer 1

Candonia's opportunity cost for the production of Potatoes = 6/12 = 0.5 pounds of coffee.

Candonia's opportunity cost for the production of coffee= 12/6 = 2 pounds of potatoes.

Similarly, Desonia's opportunity cost for the production of potatoes= 12/8= 1.5 pound of coffee.

Desonia's opportunity cost for the production of coffee = 8/12= 0.67 pound of potatoes.

Because Candonia has the lower opportunity in the production of potatoes and Desonia has a lower opportunity cost in the production of coffee.

This implies that Candonia has a comparative advantage in the production of Potatoes , while Desonia has a comparative advantage in the production of Coffee. 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 12 million pound of Potatoes (i.e only Candonia would produce) and 12 million pound of coffee (i.e only Desonia would produce).

Suppose that Candonia and Desonia agree to trade. The countries decide to exchange 4 million pounds of potatoes for 4 million pounds of coffe.

Then ,

		CANDONIA		DESONIA
		Potatoes (Millions of pounds)	Coffee (Millions of pounds)	Potatoes (Millions of pounds)	Coffee (Millions of pounds)
Without trade	Production and consumption	6	3	6	3
With trade	Production	12	0	0	12
	Trade	Export 4	Import 4	Import 4	Export 4
	Consumption	(12-4)=8	4	4	(12-4)=8

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

TRUE Without engaging in international trade , Candonia and Desonia would not have been able to consume at the after trade consumption bundles as it lies outside the PPFs.