When a country specializes in the production of a good, this means that it can p

Question

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 Maldonia and Lamponia. Both countries produce lemons and tea, each initially (i.e., before specialization and trade) producing 6 million pounds of lemons and 3 million pounds of tea, as indicated by the grey stars marked with the letter A. Maldonia Lamponia 12 12 PPF 10 PPF 2 0 2 4 8 10 12 416 0 2 4 8 10 12 14 16 LEMONS (Millions of pounds) LEMONS (Millions of pounds) Maldonia has a comparative advantage in the production of production of comparative advantage. After specialization, the two countries can produce a total of , while Lamponia has a comparative advantage in the . Suppose that Maldonia and Lamponia specialize in the production of the goods in which each has a million pounds of lemons and million pounds of tea Suppose that Maldonia and Lamponia 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 2 million pounds of lemons for 2 million pounds of tea. This ratio of goods is known as the terms of trade between Maldonia and Lamponia

Explanation / Answer

Maldonian has Comparative advantage in the production of LEMON , while LAMPONIA has comparative advantage in the prodution of TEA . Beacuse Maldonia has to sacrifice only 4 Million pounds of tea to produce Lemon while Lamponia has to sacrifice 6 million pounds of Tea to produce lemon.

After specialisation,two countires can produce a total of 18 million pounds of Tea and 18Million pounds of lemon.

MALDONIA will be consuming 4 million pounds of Lemon and 5 million of tea. the point will move along the line to the left.

LAMPONIA will comsume 8 million pounds of Lemon adn 1 million pounds of Tea. The point will move along the line to the right.

TRUE.. Because when both countries come into international trade, they are consuming both lemon and tea far less than their productive capacities. Maldonia can produce 6mp but consumes only 5mp of tea.It can produce 12mp of lemon but consumes only 4mp.

Lamponia can produce 12mp of tea while it consumes only 1mp. It can produce 8 mp of lemon while consumes 8mp.

Without trade, they could still manage to produce both goods to their self- sufficiency.

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