Question

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 Freedonia and Lamponia. Both countries produce lemons and sugar, each initially (i.e., before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of sugar, as indicated by the grey stars marked with the letter A.

Freedonia08162432404856646456484032241680SUGAR (Millions of pounds)LEMONS (Millions of pounds)PPFA

Lamponia08162432404856646456484032241680SUGAR (Millions of pounds)LEMONS (Millions of pounds)PPFA

Freedonia has a comparative advantage in the production of   , while Lamponia has a comparative advantage in the production of   . Suppose that Freedonia and Lamponia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total ofmillion pounds of sugar and

million pounds of lemons.

Suppose that Freedonia and Lamponia 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 16 million pounds of lemons for 16 million pounds of sugar. This ratio of goods is known as the price of trade between Freedonia and Lamponia.

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.

FreedoniaConsumption After Trade08162432404856646456484032241680SUGAR (Millions of pounds)LEMONS (Millions of pounds)PPFA

The following graph shows the same PPF for Lamponia as before, as well as its initial consumption at point A.

As you did for Freedonia, place a black point (plus symbol) on the following graph to indicate Lamponia's consumption after trade.

LamponiaConsumption After Trade08162432404856646456484032241680SUGAR (Millions of pounds)LEMONS (Millions of pounds)PPFA

True or False: Without engaging in international trade, Freedonia and Lamponia would 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

Answer 1