Question

Suppose there are only two countries in our world – Zooland (we can call it ‘Z’ for short) and Ecotopia (we can call it ‘E’ for short). Zooland and Ecotopia both have the ability to produce two goods, widgets and sandals. In a year Zooland can produce 100 widgets OR 500 sandals while Ecotopia can produce either 150 widgets OR 400 sandals.

1. Draw the Production Possibility Curves which represents the above information.
2. If they were to specialise in the production of one good over the other, in which good should each country specialise? Explain.
3. Assume currently each country spends half the year producing widgets and half the year producing sandals – would specialising and trading help both of these countries? Explain.
4. Graphically represent your answer from (c).

Answer 1

The production possibility curves of both economies is shown below

A is the point of initial consumption and production.

B is the point of consumption and production before trade.

Zooland can produce either 100 widgets or 500 sandals. So the opportunity cost to produce one widget is 5 sandals and 1 sandal is 1/5 widget

Similarly ecotopia can produce either 150 widget or 400 sandal. So the opportunity cost to produce one widget is 2.67 sandal and 1 sandal is 0.375 widget

Hence the opportunity cost or produce widget is less in ecotopia and of sandal is less in zooland so Zooland will produce sandal and Ecotopia will produce widget.

If they both produce the goods as said, then Zooland would produce 500 sandals and Ecotopia will produce 150 widgets.

When they trade , it would be anywhere between 1 widget for 2.67 to 5 sandal.

So here the ratio taken is 1:4. If Ecotopia exports 60 widgets in exchange of 240 sandals, then Ecotopia would have 90 widgets and 240 sandals and Zooland would have 60 widgets and 260 sandals. Both would be better off. This is shown in the graph of the PPCs where C and D are the points of consumption after trade.

Specialising would help both the countries.

(You can comment for doubts)