Question

Edit View History Bookmarks Window Help 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 Candona and Desoia. Both countries produce grain and coffee, each initially (i.e., before specialization and trade) producing 24 milion pounds of grain and 12 million pounds of coffee, as indicated by the grey stars marked with the letter A 0 16 24340 6 GRAN (Milons of pounds GRAIN (Mons of pounds)

Answer 1

Candonia can produce 48 million pounds of coffee if it uses all the resources in the production of coffee.

Candonia can produce 32 million pounds of grain if it uses all the resources in the production of grain

So the opportunity cost of producing 1 unit of coffee for Candonia = 32/48 = 0.667 units of grain.

The opportunity cost of producing 1 unit of grain for Candonia = 48/32 = 1.5 units of coffee.

Desonia can produce 24 million pounds of coffee if it uses all the resources in the production of coffee.

Desonia can produce 48 million pounds of grain if it uses all the resources in the production of grain

So the opportunity cost of producing 1 unit of coffee for Desonia = 48/24 = 2 units of grain.

The opportunity cost of producing 1 unit of grain for Desonia = 24/48 = 0.5 units of coffee.

As the opportunity cost of producing coffee is less for Candonia, it will specialize in the production of coffee and it produce only coffee. As the opportunity cost of producing grain is less for Desonia, it will specialize in the production of grain and it will produce only grains.

Candonia has a comparative advantage in the production of coffee, while Desonia has a comparative advantage in the production of grains. After specialization , the two countries can produce a total of 48 million pounds of coffee and 48 million pounds of grain.

If Candonia trades 16 million pounds of coffee for 16 million pounds of grain, Candonia will have a consumption of 32 million pounds of coffee and 16 million pounds of grains.