Question

4. Specialization and trade 

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 Sylvania. Both countries produce lemons and coffee, each initially (i.e., before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of coffee, as indicated by the grey stars marked with the letter A. 

Candonia has a comparative advantage in the production of _______ , while Sylvania has a comparative advantage in the production of _______ .Suppose that Candonia and Sylvania specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of _______ million pounds of lemons and _______ million pounds of coffee.

Suppose that Candonia and Sylvania 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 lemons for 12 million pounds of coffee. This ratio of goods is known as the price of trade between Candonia and Sylvania.

Answer 1

a) Candonia has a comparative advantage in the production of "lemons", while Sylvania has a comparative advantage in the production of "Coffee" .

b) After specialiaztion the two nations can produce a total of 36 million pound of lemons and 36 million pounds of coffee.