4. Specialization and trade When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Lamponia. Both countries produce lemons and sugar, each initially (that is, before specialization and trade) producing 18 million pounds of lemons and 9 million pounds of sugar, as indicated by grey points (star symbols) labeled point A. 18 PPF Maldonia has a comparative advantage in the production of production of 24 advantage), the most the two countries can produce is 10 30 Maldonia PPF 30 12 10 24 30 36 42 40 LEMONS (Mons of pounds) PPF Suppose that Maldonia and Lamponia specialize and open up to international trade, and the terms of trade in the world market are 1 pound of lemons for 1 pound of sugar. That is, Maldonia is willing to sell Lamponia 1 pound of lemons in exchange for 1 pound of sugar, and Lamponia is willing to sell Maldonia 1 pound of sugar in exchange for 1 pound of lemons. The countries decide to exchange 12 million pounds of lemons for 12 million pounds of sugar. The following graph shows the same PPP for Maldonia as before, as well as its initial consumption at point A. Use the green line (triangle symbol) to plot the trading possibilities line (TPL) for Maldonia. Then place the black point (plus symbol) on the trading possibilities line to indicate Maldonia's consumption after specialization and trade. O True Maldonia False 24 30 LEMONS (Millions of pounds) ? 30 D Lamponia 0 whille Lamponia has a comparative advantage in the If each fully specializes (that is, produces only the good for which each has a comparative million pounds of lemons and million pounds of sugar PPF 24 30 30 LEMONS (Millions of pounds) LEMONS (Millions of pounds) Lamponia The following graph shows the same PPF for Lamponia as before, as well as its initial consumption at point A. As you did for Maldonia, use the green line (triangle symbol) to plot the trading possibilities line (TPL) for Lamponia. Then place the black point (plus symbol) on the trading possibilities line to indicate Lamponia's consumption after specialization and trade. ? tet TPL Consumption After Trade 41 TPL ? + Consumption After Trade True or False: Without engaging in international trade, Maldonia and Lamponia would have been able to consume at the after-trade consumption bundles. (Hint: Base your answer to this question on the answers you previously entered on this page.)

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios. Who has the absolute advantage in the production of rubber or radios? How can you tell? Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine,) Which country has a comparative advantage in the production of radios? Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber? In this example, does each country have an absolute advantage and a comparative advantage in the same good? In what product should Japan specialize? In what product should Malaysia specialize?

Under what conditions does comparative advantage lead to gains from trade?

In Germany it takes three workers to make one television and four workers to make one video camera. In Poland It takes six workers to make one television and 12 workers to make one video camera. Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell? Calculate the opportunity cost of producing one additional television set in Germany and In Poland. (Your calculation may involve fractions, which Is tine.) Which country has a comparative advantage in the production of televisions? Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras? In this example, is absolute advantage the same as comparative advantage, or not? In what product should Germany specialize? In what product should Poland specialize?