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1. Specialization and trade A country may specialize in the production of a good that it can produce at a lower opportunity cost than its

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1. Specialization and trade A country may specialize in the production of a good that it can produce at a lower opportunity cost than its trading partners. Because of this comparative advantage, countries benefit when they specialize and trade with each other. The following graphs show the production possibilities curves (PPCS) for Maldonia and Sylvania. Both countries produce grain and sugar, each initia 6.e., before specialization and trade) producing 24 million pounds of grain and 12 million pounds of sugar, as indicated by the grey stars marked w the letter A. Maldonia Sylvania 54 64 58 8 PPC 48 40+ 40 SUGAR (Milions of poundo) 32 . SUGAR (Milions of pounds) 24 PPC 15 10 8 0 a 8 64 O 56 16 24 32 40 45 GRAIN (Millions of pounds) 10 24 32 GRAIN (Millions of pounds) Maldonia has a comparative advantage in the production of while Sylvania has a comparative advantage in the production of Suppose that Maldonia and Sylvania specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of sugar and million pounds of grain Suppose that Maldonia and Sylvania 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 16 million pounds of grain for 16 million pounds of sugar. This ratio of goods is sometimes referred to a the terms of trade between two countries. In this case the two countries are Maldonia and Sylvania The following graph shows the same PPC for Maldonia as before, as well as its initial consumption at point A. Place a black point (plus symbol on the graph to indicate Maldonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. Maldonia has a comparative advantage in the production of production of . Suppose that comparative advantage. After specialization, the two countr grain. while Sylvania has a comparative advantage in t ecialize in the production of the goods in which each ha million pounds of sugar and million pou grain sugar neither grain nor sugar Suppose that Maldonia and Sylvania agree to trade. Each ca s on producing only the good in which it has a comparat advantage. The countries decide to exchange 16 million pou both grain and sugar pounds of sugar. This ratio of goods is sometimes refer the terms of trade between two countries. In this case the two countries are Maldonia and Sylvania. The following graph shows the same PPC for Maldonia as before, as well as its initial consumption at point A. Place a black point (plus symbol graph to indicate Maldonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. Maldonia 64 56 Consumption After Trade 18 PPC 40 SUGAR (Millions of pounds) 32 24 16 1 B o 8 56 54 16 32 40 GRAIN (Millions of pounds) The following graph shows the same PPC for Sylvania as before, as well as its initial consumption at point A. SUGAR (Milions of pounds 2 44 40 GRAIN(Midoos of pounds) The following graph shows the same PPC for Sywania as before, as well as its initial consumption at point A. As you did for Maldonia, place a black point (plus symbol) on the following graph to indicate Sylvania consumption after trade Sylvania Consumption A Trade co 40 SUGAR Mens of pounds) 22 24 poc 16 54 24 GRAN Mons of pounds) True or Falso: without engaging in international trade, Maldonia and Sylvania would not have been able to consume at the after-trade consumo bundies. (Hint: to answering this question, you may wish to refer to your previous answers:) The False

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