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 Shenandoah and Rainier. Both countries produce peas and lentils, each initially (i.e., before specialization and trade) producing 18 million pounds of peas and 9 million pounds of lentils, as indicated by the grey stars marked with the letter A. LENTILS (Millions of pounds) peas. 48 42 36 PPF 30 24 18 12 6 0 0 + 6 Shenandoah 12 18 24 30 36 PEAS (Millions of pounds) 42 48 LENTILS (Millions of pounds) 48 42 36 30 24 18 PPF 12 6 0 + 0 6 Rainier 12 18 24 30 36 PEAS (Millions of pounds) 42 48 , while Rainier has a comparative advantage in the Shenandoah has a comparative advantage in the production of production of . Suppose that Shenandoah and Rainier 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 lentils and million pounds of Suppose that Shenandoah and Rainier 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 6 million pounds of peas for 6 million pounds of lentils. This ratio of goods is known as the price of trade between Shenandoah and Rainier. The following graph shows the same PPF for Shenandoah as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Shenandoah's consumption after trade.
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 Shenandoah and Rainier. Both countries produce peas and lentils, each initially (i.e., before specialization and trade) producing 18 million pounds of peas and 9 million pounds of lentils, as indicated by the grey stars marked with the letter A. LENTILS (Millions of pounds) peas. 48 42 36 PPF 30 24 18 12 6 0 0 + 6 Shenandoah 12 18 24 30 36 PEAS (Millions of pounds) 42 48 LENTILS (Millions of pounds) 48 42 36 30 24 18 PPF 12 6 0 + 0 6 Rainier 12 18 24 30 36 PEAS (Millions of pounds) 42 48 , while Rainier has a comparative advantage in the Shenandoah has a comparative advantage in the production of production of . Suppose that Shenandoah and Rainier 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 lentils and million pounds of Suppose that Shenandoah and Rainier 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 6 million pounds of peas for 6 million pounds of lentils. This ratio of goods is known as the price of trade between Shenandoah and Rainier. The following graph shows the same PPF for Shenandoah as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Shenandoah's consumption after trade.
Chapter1: Making Economics Decisions
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Transcribed Image Text: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 Shenandoah and Rainier. Both countries produce peas and lentils, each
initially (i.e., before specialization and trade) producing 18 million pounds of peas and 9 million pounds of lentils, as indicated by the grey stars
marked with the letter A.
LENTILS (Millions of pounds)
peas.
48
42
36
30
24
18
12
6
0
0
PPF
6
Shenandoah
12 18 24 30
36
PEAS (Millions of pounds)
42 48
LENTILS (Millions of pounds)
48
42
Note: Dashed drop lines will automatically extend to both axes.
36
30
24
18
12
6
0
0
PPF
6
Rainier
12
18 24 30 36
PEAS (Millions of pounds)
Shenandoah has a comparative advantage in the production of
while Rainier has a comparative advantage in the
production of
. Suppose that Shenandoah and Rainier 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 lentils and
million pounds of
42 48
Suppose that Shenandoah and Rainier 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 6 million pounds of peas for 6 million pounds of lentils. This ratio of goods is known as the price of
trade between Shenandoah and Rainier.
The following graph shows the same PPF for Shenandoah as before, as well as its initial consumption at point A. Place a black point (plus symbol) on
the graph to indicate Shenandoah's consumption after trade.
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