You are the Minister of Trade for a small island country with the following annu

ID: 1143718 • Letter: Y

Question

You are the Minister of Trade for a small island country with the following annual PPC:

You are negotiating a trade agreement with a neighboring island with the following annual PPC:

As soon as you see the other island's PPC, you realize there are:

Select one:

a. no gains from trade because your both have the same comparative advantage.

b. no gains from trade because there is no difference in your ability to harvest coconuts.

c. no gains from trade because the other island has an absolute advantage.

d. gains from trade because your island has a comparative advantage in coconuts.

500 Annual PPC on Your Island 1,500 Fish Per Year

Opportunity cost of producing 1 coconut = maximum fish production/maximum coconut production

Own country:

Opportunity cost of producing 1 coconut = 1500/500 = 3 fish

Neighbouring country:

Opportunity cost of producing 1 coconut = 2500/500 = 5 fish

Option d is correct

As the opportunity cost of producing coconut is less, there is a comparative advantage and there are gains which can be made by engaging in trade.

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.