Question
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
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 Candonia and Lamponia. Both countries produce grain and sugar, each initially (i.e., before specialization and trade) producing 12 million pounds of grain and 6 million pounds of sugar, as indicated by the grey stars marked with the letter A.
Candonia
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SUGAR (Millions of pounds)
GRAIN (Millions of pounds)
PPF
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Lamponia
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Candonia has a comparative advantage in the production of , while Lamponia has a comparative advantage in the production of . Suppose that Candonia 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 sugar andmillionpounds of grain.
Suppose that Candonia 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 grain for 12 million pounds of sugar. This ratio of goods is known as theprice of tradebetween Candonia and Lamponia.
The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Candonia's consumption after trade.
Note: Dashed drop lines will automatically extend to both axes.
Candonia
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 Candonia, 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, Candonia 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
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Crashed How A Decade Of Financial Crises Changed The World
Authors: Adam Tooze
1st Edition
0143110357, 9780143110354
