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 Is 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 Freedonia and Sylvania. Both countries produce potatoes and tea, each initially (i.e., before specialization and trade) producing 18 million pounds of potatoes and 9 million pounds of tea, as indicated by the grey stars marked with the letter A. Freedonia Sylvania 48 48 42 42 36 36 PPF 30 30 24 24 18 PPF 18 12 12 ----- 6 12 18 24 POTATOES (Millions of pounds) 30 36 42 12 18 24 30 36 42 48 POTATOES (Millions of pounds) Freedonia has a comparative advantage in the production of v , while Sylvania has a comparative advantage in the production of Suppose that Freedonia 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 potatoes and million pounds of tea. Suppose that Freedonia 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 18 million pounds of potatoes for 18 million pounds of tea. This ratio of goods is known as the price of trade between Freedonia and Sylvania. The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Freedonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. TEA(MIlions of pounds) (spunod jo suoiwyaL
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 Is 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 Freedonia and Sylvania. Both countries produce potatoes and tea, each initially (i.e., before specialization and trade) producing 18 million pounds of potatoes and 9 million pounds of tea, as indicated by the grey stars marked with the letter A. Freedonia Sylvania 48 48 42 42 36 36 PPF 30 30 24 24 18 PPF 18 12 12 ----- 6 12 18 24 POTATOES (Millions of pounds) 30 36 42 12 18 24 30 36 42 48 POTATOES (Millions of pounds) Freedonia has a comparative advantage in the production of v , while Sylvania has a comparative advantage in the production of Suppose that Freedonia 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 potatoes and million pounds of tea. Suppose that Freedonia 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 18 million pounds of potatoes for 18 million pounds of tea. This ratio of goods is known as the price of trade between Freedonia and Sylvania. The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Freedonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes. TEA(MIlions of pounds) (spunod jo suoiwyaL
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter3: Interdependence And The Gains From Trade
Section: Chapter Questions
Problem 5PA
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The two drop bar options are (potatoes, tea, neither potatoes nor tea, both potatoes and tea)
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