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 Maldonia and Desonia. Both countries produce lemons and sugar, each initially (i.e., before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of sugar, as indicated by the grey stars marked with the letter A. Maldonia Desonia PPF SUGAR (Millions of pounds) SUGAR (Millions of pounds) PPF + 0 + 8 56 64 0 8 64 16 24 32 40 48 LEMONS (Millions of pounds) 16 24 32 40 48 56 LEMONS (Millions of pounds) Maldonia has a comparative advantage in the production of sugar , while Desonia has a comparative advantage in the production of lemons . Suppose that Maldonia 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 48 million pounds of sugar and 48 million pounds of lemons. Suppose that Maldonia and Desonia 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 lemons for 24 million pounds of sugar. This ratio of goods is known as the price of trade between Maldonia and Desonia.

Answer 1