Question

ELUZU Homework ( C 3 ) When a country has a comparative advantage in the production of a good, it means that 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 (PPP) for Freedonia and Desonia. Both countries produce potatoes and coffee, each Initially (Le., before specialization and trade) producing 12 million pounds of potatoes and 6 milion pounds of coffee, as indicated by the grey stars marked with the letter A. COFFEE (Milions of pounds) COFFEE Mons of pounds) 32 2 16 20 24 28 POTATOES Millions of pounds) POTATOES Millions of pounds) Freedonia has a comparative advantage in the production of whe Desola has a comparative advantage in the production of Suppose that Freedonia and Desoni specialize in the production of the goods in which each has a

Answer 1

Freedonia's opportunity cost for the production of potatoes = 24/16 = 1.5 pounds of coffee.

Freedonia's opportunity cost for the production of coffee = 16/24 = 0.67 pounds of potatoes.

Similarly, Desonia's opportunity cost for the production of potatoes = 12/24= 0.5 pounds of coffee.

Desonia's opportunity cost for the production of Coffee = 24/12= 2 pounds of potatoes.

Because Freedonia has the lower opportunity in the production of Coffee and Desonia has a lower opportunity cost in the production of Potatoes.

This implies that Freedonia has a comparative advantage in the production of coffee , while Desonia has a comparative advantage in the production of potatoes. 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 24 million pounds of coffee (i.e only Freedonia would produce) and 24 million pounds of potatoess (i.e only Desonia would produce).

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

Then ,

		FREEDONIA		DESONIA
		Potatoes (Millions of pounds)	Coffee (Millions of pounds)	Potatoes (Millions of pounds)	Coffee (Millions of pounds)
Without trade	Production and consumption	12	6	12	6
With trade	Production	0	24	24	0
	Trade	Import 4	Export 4	Export 4	Import 4
	Consumption	4	(24-4)=20	(24-4)=20	4

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

COFFEE (Millions of pounds) FREEDONIA 24 - Consumption hade + + + + + + 12 16 20 24 28 32. POTATOES (Millions of pounds

COFFEE (Millions of pounds) DE SONIA 28 Consumption rade after 4 0 - 8 12 16 20 24 28 32 POTATOES (millions of pounds)

TRUE without engaging in international trade , Freedonia and Desonia would not have been able to consume the after trade consumption point because it lies outside the PPF.