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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
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 (PPF=) for Shenandoah and Rainier. Both countries produce peas and lentils, each initially (ive., before specialization and trade) producing 36 million pounds of peas and 18 million pounds of lentils, as indicated by the grey stars marked with the letter A. (? (?) Shenandoah Rainier 96 84 PPF 60 LENTILS ( Millions of pounds) LENTILS (Millions of pounds) PP 12 24 36 48 60 72 84 96 12 24 36 48 60 72 84 96 PEAS (Millions of pounds) PEAS (Millions of pounds) Shenandoah has a comparative advantage in the production of lentils 7, while Rainier has a comparative advantage in the production of peas . Suppose that Shenandoah and Rainier 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 peas and |million pounds of lentils. Suppose that Shenandoah and Rainier 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 24 million pounds of peas for 24 million pounds of lentils. This ratio of goods is known as the price of trade between Shenandoah and Rainier. The following graph shows the same FFF for Shenandoah as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Shenandoah's consumption after trade. Note: Dashed drop lines will automatically extend to both axes.Shenandoah 34 Consumption After Trade LENTILS (Millions of pounds) 38 PPI 24 A 12 24 36 48 72 PEAS (Millions of pounds) The following graph shows the same PPF for Rainier as before, as well as its initial consumption at point A. As you did for Shenandoah, place a black point (plus symbol) on the following graph to indicate Rainier's consumption after trade. (? Rainier 26 BA Consumption After Trade 72 PPP LENTILS (Millions of pounds) 38 24 12 12 24 36 48 72 84 PEAS (Millions of pounds) True or False: Without engaging in international trade, Shenandoah and Rainier 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 O False
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