4. S and trade When a country has a comparative advantage in the production of a

Question

4. S 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 Candonia and Sylvania. Both countries produce potatoes and coffee, each Initially (I.e., before specialization and trade) producing 12 million pounds of potatoes and 6 million pounds of coffee, as indicated by the grey stars marked with the letter A. Sylvania 24 PPF PF 12,6 0 4 12 1 20 2 20 32 04 1216 20 24 2 32 POTATOES (Millions of pounds)

Explanation / Answer

You got wrong the concept of specialization. (And there is one page missing in the question which mentioned about the exchage of 4 units of coffee for 4 units of potatoes, get that page please, it will be clear.)

Specialization means producing the good to the full potential in which the nation has a comparative advantage. For example, If Candonia has a comparative advantage in the production of Coffee, then they would only produce coffee and nothing else. That means a total production of 24 units of Coffee. Similarly, with Sylvania but with a different product.

After trade they will exchange 4 units in exchange of other good. Candonia will have a total of (24 - 4) 20 units of Coffee (4 they gave away to other nation) and 4 units of Potatoes (this is what they got in return for coffee). Total consumption after trade 24 units (20 coffee + 4 potatoes.)

On the other hand, Sylvania will have the same consumption but 20 units of potatoes (4 given away to candonia) and 4 units of Coffee (they got form candonia). A total of 24 units. (20 potatoes + 4 Coffee).

So, their overall consumption will be higher than what they would have consumed if there was no trade. The answer to the last statement is True. (Without trade they would have consumed 16 + 4 units, as per the graph of their respective products.)

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