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 lemons and sugar, each initially (.e., before specialization and trade) producing 6 million pounds of lemons and 3 million pounds of sugar, as indicated by the grey stars marked with the letter A. Freedonia Desonia SUGAR (Millions of pounds) SUGAR Millions of pounds) 0 2 14 16 2 14 16 4 6 8 10 12 LEMONS (Millions of pounds) 4 6 8 10 12 LEMONS (Millions of pounds)

Answer 1

Using all its resources in production of respective good, Freedonia can produce either 6 million pounds of sugar or 12 million pounds of lemons.

The opportunity cost of producing 1 pound of sugar is (12/6) 2 pounds of lemon and the opportunity cost of producing 1 pound of lemon is (6/12) 0.5 pounds of sugar.

Using all its resources in production of respective good, Desonia can produce either 12 million pounds of sugar or 8 million pounds of lemons.

The opportunity cost of producing 1 pound of sugar is (8/12) 0.67 pounds of lemon and the opportunity cost of producing 1 pound of lemon is (12/8) 1.5 pounds of sugar.

Freedonia can produce lemons at lower opportuity cost than Desonia.

Desonia can produce sugar at lower opportunity cost than Freedonia.

Freedonia has a comparative advantage in the production of lemons, while Desonia has a comparative advantage in the production of sugar.

Suppose the Freedonia and Desonia specializes 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 pounds of lemons and 12 million pouds of sugar.

The price of trade is exchange of 2 million pounds of sugar for 2 million pounds of lemons.

So,

After trade, Freedonia will consume 2 million pounds of sugar and 10 million pounds of lemons.

After trade, Desonia will consume 10 million pounds of sugar and 2 million pounds of lemons.

Following is the required figure -

Desonia 12 ppp Consumption after trade SUGAR Millions of pounds) SUGAR Millions of sounds) Consumption after trade 2 14 1 LEMONS (Millions of pounds) 10 12 LEMONS (Millions of pounds)

The after trade combination lies outside the respective PPF of both countries.

So, without international trade, they would not be able to consume the after-trade consumption bundle.

Thus,

The given statement is False.