2. Consumption possibilities based on comparative advantage

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 Candonia and Desonia. Both countries produce grain and coffee, each initially (i.e., before specialization and trade) producing 18 million pounds of grain and 9 million pounds of coffee, as indicated by the grey stars marked with the letter A.

Candonia06121824303642484842363024181260COFFEE (Millions of pounds)GRAIN (Millions of pounds)PPFA

Desonia06121824303642484842363024181260COFFEE (Millions of pounds)GRAIN (Millions of pounds)PPFA18, 9

Candonia has a comparative advantage in the production of , while Desonia has a comparative advantage in the production of . Suppose that Candonia 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 of

millionpounds of grain and

millionpounds of coffee.

Suppose that Candonia 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 18 million pounds of grain for 18 million pounds of coffee. This ratio of goods is known as the terms of tradebetween Candonia and Desonia.

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

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

CandoniaConsumption After Trade06121824303642484842363024181260COFFEE (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 Candonia, place a black point (+ symbol) on the following graph to indicate Desonia's consumption after trade.

DesoniaConsumption After Trade06121824303642484842363024181260COFFEE (Millions of pounds)GRAIN (Millions of pounds)PPFA

True or False: Without engaging in international trade, Candonia 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