4. Specializa Aplia App rade When a country has a comparative advantage in the p

Question

4. Specializa Aplia App rade 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 lemons and sugar, each initially (i.e., before specialization and trade) producing 12 million pounds of lemons and 6 million pounds of sugar, as indicated by the grey stars marked with the letter A Maldonia Desonia 28 28 24 PPF 24 20 16 16 12 0 4 81216 20 24 28 32 0 4 8 12 20 24 28 32 LEMONS (Millions of pounds) LEMONS (Millions of pounds)

Explanation / Answer

Maldonia has a comparative advantage in the production of Sugar and Desonia has a comparative advantage in the production of Lemon (the opportunity cost of one lemon in Desonia is 1/2 while it is 3/2 in Maldonia. Similarly, the opportunity cost of producing a unit of Sugar in Maldonia is 2/3 while it is 2 in Desonia).

If the two countries specialize, then after specialization the two countries can produce a total of 24 million pounds of sugar and 24 million pounds of Lemon.

When both the countries decide to trade 4 million pounds of Lemon for 4 million pounds of Sugar, Maldonia's consumption after trade = 12 million pounds of Sugar and 12 million pounds of LEmon (The new consumption point is outside the original PPF indicating increase in consumption due to specialozation).

Similarly, Desonia's new consumption point for (Lemon, Sugar) = (12,12)

True. Without engaging in trade both the countries would not have been able to consume the after-trade consumption bundles.

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