Suppose the graph on the next page shows Tanzania's production possibilities frontier for cashew nuts and mangoes. Assume that the output per hour of work is 8 bushels of cashew nuts or 2 bushels of mangoes and that Tanzania has 1,000 hours of labor. Without trade, Tanzania evenly splits its labor hours between cashews and mangoes and produces and consumes at point A.

a. Suppose Tanzania opens trade with Kenya, and Kenya's output per hour of work is 1 bushel of cashew nuts or 1 bushel of mangoes. Having the comparative advantage, Tanzania completely specializes in cashew nuts. How many bushels of cashew nuts can Tanzania produce? Denote this point on the graph as point B.
b. Suppose Tanzania keeps 5,000 bushels of cashew nuts and exports the remaining 3,000 bushels. If the terms of trade are 1 bushel of mangoes for 2 bushels of cashew nuts, how many bushels of mangoes will Tanzania get in exchange? Denote on the graph the quantity of cashew nuts and mangoes that Tanzania consumes with trade and label this point as point C. How does point C with trade compare to point A without trade?
c. With trade, is Tanzania producing on its production possibilities frontier? With trade, is Tanzania consuming on its production possibilities frontier?

Transcribed Image Text:

Cashew nuts (bushels) 4,000 PPF Mangoes (bushels) 1,000