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 grain and coffee, each Initially (.e., before specialization and trade) producing 12 million pounds of grain and 6 million pounds of coffee, as indicated by the grey stars marked with the letter A. 

 Freedonia has a comparative advantage in the production of_______   while Desonia has a comparative advantage in the production of _______ 

 Suppose that Freedonia 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 _______  million pounds of coffee and _______  million pounds of grain.

 Suppose that Freedonia 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 12 million pounds of grain for 12 million pounds of coffee. This ratio of goods is known as the price of trade between Freedonia and Desonia.

 

Answer 1