Question

rk (Ch 03) Attempts: 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 potatoes and sugar, each initially (I.e., before specialization and trade) producing 18 million pounds of potatoes and 9 million pounds of sugar, as indicated by the grey stars marked with the letter A. Desonia 30 +

Answer 1

Comparative Advantage

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Maldonia:

18 million pounds of sugar = 36 million pounds of potatoes

1 pound of sugar = 36/18 = 2 pounds of potatoes

1 pound of potato = 18/36 = 0.5 pounds of sugar

Opportunity cost of producing 1 pound of sugar is 2 pounds of potatoes and 1 pound of potato is 0.5 pound of sugar.

Desonia:

36 million pounds of sugar = 24 million pounds of potatoes

1 pound of sugar = 24/36 = 0.67 pounds of potatoes

1 pound of potato = 36/24 = 1.5 pounds of sugar

Opportunity cost of producing 1 pound of sugar is 0.67 pounds of potatoes and 1 pound of potato is 1.5 pound of sugar.

Maldonia has comparative advantage in the production of potatoes.

Desonia has comparative advantage in the production of sugar.

Total production of potatoes by Maldonia = 36 million pounds

Total production of sugar by Desonia = 36 million pounds

After Trade:

Desonia : Potatoes = 0 + 12 million potatoes = 12 million potatoes

Sugar = 36 million - 12 million = 24 million sugar

Maldonia: Potatoes = 36 million - 12 million = 24 million potatoes

Sugar = 0 + 12 million = 12 million sugar

Desonia Maldonia Consumption After Trade Consumption After Trade 36 PPF 24 12 18 24 30 36 42 48 POTATOES (Mitions of pounds) 12182430 42 48 POTATOES (Mitions of pounds)

False, without free trade countries are not able to produce combination bundle which lies outside PPF.