KEY QUESTION To the right are hypothetical production possibilities tables for New Zealand and Spain. Each country can produce apples and plums.

Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following:

a. What is each country’s cost ratio of producing plums and apples.

b. Which nation should specialize in which product?

c. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.)

d. Suppose the optimum product mixes before specialization and trade were alternative B in New Zealand and alternative S in Spain. What would be the gains from specialization and trade?