1. Specialization and trade When a country specializes in the production of a go

Question

1. Specialization and trade

When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other.

The following graphs show the production possibilities frontiers (PPFs) for Freedonia and Desonia. Both countries produce grain and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of grain and 12 million pounds of tea, as indicated by the grey stars marked with the letter A.

Freedonia08162432404856646456484032241680TEA (Millions of pounds)GRAIN (Millions of pounds)PPFA

Desonia08162432404856646456484032241680TEA (Millions of pounds)GRAIN (Millions of pounds)PPFA

Freedonia has a comparative advantage in the production oftea  , while Desonia has a comparative advantage in the production ofgrain  . 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 ofmillion pounds of tea andmillion 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 24 million pounds of grain for 24 million pounds of tea. This ratio of goods is known as the terms of trade between Freedonia and Desonia.

The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Freedonia's consumption after trade.

Note: Dashed drop lines will automatically extend to both axes.

FreedoniaConsumption After Trade08162432404856646456484032241680TEA (Millions of pounds)GRAIN (Millions of pounds)PPFA

The following graph shows the same PPF for Desonia as before, as well as its initial consumption at point A.

As you did for Freedonia, place a black point (plus symbol) on the following graph to indicate Desonia's consumption after trade.

DesoniaConsumption After Trade08162432404856646456484032241680TEA (Millions of pounds)GRAIN (Millions of pounds)PPFA

True or False: Without engaging in international trade, Freedonia and Desonia would not have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.)

True

False

Explanation / Answer

TRUE

Explaination

Without engaging in international trade, any quantity outside a country's original production possibilities
frontier is considered not feasible. In other words, given an individual country's resources, the bundles on
the production possibilities frontier are the greatest quantities of the goods shown that a country can
produce (and, therefore, consume) without international trade. By exploiting each country's comparative
advantage, Freedonia and Sylvania can actually consume outside of their individual production
possibilities frontiers through specialization and trade.

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