6 . Specialization and trade 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 Freedonia and Lamponia. Both countries produce grain and tea, each initially (that is, before specialization and trade) producing 24 million pounds of grain and 12 million pounds of tea, as indicated by grey points (star symbols) labeled point A. Freedonia Lamponia 64 64 55 55 7; 4s 7; 4a 'U 'U I: I: 8 40 g 40 __ D. Q. '5 \"5 w 32 v: 32 __ E E g g E 24 S 24 E E l 15 | 16 a 8 O l | l l O l | 40 48 56 64 GRAIN (Millions of pounds) GRAIN (Millions of pounds) 56 -- 56 7; 48 7;; 43 U 'U C C 3 40 3 40 D. D. '5 \"5 In 32 in 32 C C 2 s E 24 S 24 PPF E E ._ 16 ._ 16 A 8 8 I 0 l l l l 0 l l I l l l l 40 48 56 64 8 16 24 32 40 48 56 64 GRAIN (Millions of pounds) GRAIN (Millions of pounds) Freedonia has a comparative advantage in the production of tea V , while Lamponia has a comparative advantage in the production of grain V . If each fully specializes (that is, produces only the good for which each has a comparative advantage), the most the two countries can produce is million pounds of tea and million pounds of grain. Suppose that Freedonia and Lamponia specialize and open up to international trade, and the terms of trade in the world market are 1 pound of grain for 1 pound of tea. That is, Lamponia is willing to sell Freedonia 1 pound of grain in exchange for 1 pound of tea, and Freedonia is willing to sell Lamponia 1 pound of tea in exchange for 1 pound of grain. The countries decide to exchange 24 million pounds of grain for 24 million pounds of tea. The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Use the green line (triangle symbol) to plot the trading possibilities line (TPL) for Freedonia. Then place the black paint ( plus symbol) on the trading possibilities line to indicate Freedonia's consumption after specialization and trade. Note: Dashed drop lines will automaticallv extend to both axes. \fAs you did for Freedonia, use the green line ( triangle symbol) to plot the trading possibilities line (TPL) for Lamponia. Then place the black paint ( plus symbol) on the trading possibilities line to indicate Lamponia's consumption after specialization and trade. Lamponia 64- 48 4U - . Consumption After Trade 32- 24 TEA (Millions of pounds) 16 56 64 GRAIN (Millions of pounds) True or False: Without engaging in international trade, Freedonia and Lamponia would not have been able to consume at the after-trade consumption bundles. (Hint: Base your answer to this question on the answers you previously entered on this page.) 0 True 0 False