4. Specialization 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 Maldonia and Lamponia. Both countries produce lemons and tea, each initially (i.e., before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of tea, as indicated by the grey stars marked with the letter A.

Maldonia

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LEMONS (Millions of pounds)

PPF

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Lamponia

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Maldonia has a comparative advantage in the production of , while Lamponia has a comparative advantage in the production of . Suppose that Maldonia and Lamponia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total ofmillionpounds of lemons andmillionpounds 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 12 million pounds of lemons for 12 million pounds of tea. This ratio of goods is known as theprice of tradebetween Maldonia and Lamponia.

The following graph shows the same PPF 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

Consumption After Trade

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The following graph shows the same PPF for Lamponia 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 Lamponia's consumption after trade.

Lamponia

Consumption After Trade

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True or False: Without engaging in international trade, Maldonia and Lamponia would 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