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 24 million pounds of lemons and 12 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 8 million pounds of lemons for 8 million pounds of coffee. This ratio of goods is known as the price of trade between Candonia and Sylvania. The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Candonia's consumption after trade. True or False: Without engaging in international trade, Candonia and Sylvania would not have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.) True False

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 24 million pounds of lemons and 12 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 8 million pounds of lemons for 8 million pounds of coffee. This ratio of goods is known as the price of trade between Candonia and Sylvania.

The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Candonia's consumption after trade.

True or False: Without engaging in international trade, Candonia and Sylvania would not have been able to consume at the after-trade consumption bundles. (Hint: Base this question on the answers you previously entered on this page.)

True

False

?
Sylvania
64
56
48
PPF
40
32
24
16
8
0 8
16
24
32
40
48
56
64
LEMONS (Millions of pounds)
COFFEE (Millions of pounds)

(?
Candonia
64
56
48
40
32
24
PPF
16
8.
0 8
16
24
32
40
48
56
64
LEMONS (Millions of pounds)
COFFEE (Millions of pounds)

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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