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3 . Specialization and trade A country may specialize in producing 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 Freedonia and Desonia. Both countries produce lemons and sugar, each initially (that is, before specialization and trade) producing 6 million kilograms of lemons and 3 million kilograms of sugar, as indicated by the grey stars marked with the letter A. (? Freedonia Desonia 16 16 PPC SUGAR (Millions of kilograms) SUGAR (Millions of kilograms) PPC A N 10 12 14 16 o 8 10 14 LEMONS (Millions of kilograms) LEMONS (Millions of kilograms) Freedonia has a comparative advantage in producing sugar . while Desonia has a comparative advantage in producing lemons . Suppose that Freedonia and Desonia specialize in producing the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million kilograms of lemons and million kilograms of sugar. Suppose that Freedonia 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 4 million kilograms of lemons for 4 million kilograms of sugar. This ratio of goods is known as the terms of trade between Freedonia and Desonia. The following graph shows the same PPC for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Freedonia's consumption after trade Note: Dashed drop lines will automatically extend to both axes. (?) Freedonia 16 .+ Consumption After Trade N 8 SUGAR (Millions of kilograms) PPC 10 12 14 16 LEMONS (Millions of kilograms) The following graph shows the same PPC for Desonia as before, as well as its initial consumption at point A. As you did for Freedonia, place a black point (plus symbol) on the following graph to indicate Desonia's consumption after trade. (? Desonia .+ 14 Consumption After Trade 12 PPC SUGAR (Millions of kilograms) 10 12 14 LEMONS (Millions of kilograms) True or False: Without engaging in international trade, Freedonia and Desonia would not have been able to consume at the after-trade consumption bundles. (Hint: In answering this question, you may wish to refer to your previous answers.) True O False