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 beneft when they specialize and trade with each other The following graphs show the production possibilities frontiers (PPF) for Candonia and Lamponia. Both countries produce lemons and sugar each initially (.e., before specialization and trade) producing 30 million pounds of lemons and 15 million pounds of sugar, as indicated by the grey stars marked with the letter A. Cando la Lamponia 30 70 70 8 8 8 60 PPF 50 SUGAR (Millions of pounds 40 SUGAR (Millions of pounds) 40 30 30 PPF 20 30 1 - - TO . 10+ 0 10 o 0 og 80 10 20 30 4 50 60 70 LEMONS (Millions of pounds) 0 10 2030 40 50 70 LEMONS (Millions of pounds) 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 of milion pounds of lemons and million pounds of sugar Suppose that Candonia and Lamponia agree to trade. Each country focuses its resources on producing only the good in which has a comparative advantage. The countries decide to exchange 20 million pounds of lemons for 20 million pounds of sugar. This ratio of goods is known as the terms of trade between Candonia and Lamponia. The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Candonia 80 70 Consumption After Trade 60 50 SUGAR (Millions of pounds) 40 30 PPF 20 1 1 1 10 O 0 70 80 o O 10 20 30 40 50 80 LEMONS (Millions of pounds) The following graph shows the same PPF for Lamponia as before, as well as its initial consumption at point A. Lamponia 80 70 Consumption After Trade 8 00 PPF 50 SUGAR (Milions of pounds) 40 30 20 1 1 1 1 - - 1 10 1 O 0 70 0 10 20 30 40 50 00 LEMONS (Millions of pounds) True or False: Without engaging in international trade, Candonia and Lamponia would have been able to consume at the alter-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.) 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.) O True False
