Quizzol

QUESTION:

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 Glacier and Denali. Both countries produce corn and lentils, each initially (i.e., before specialization and trade) producing 30 million pounds of corn and 15 million pounds of lentils, as indicated by the grey stars marked with the letter A.

Glacier has a comparative advantage in the production of , while Denali has a comparative advantage in the production of . Suppose that Glacier and Denali 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 corn.

Suppose that Glacier and Denali 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 20 million pounds of corn for 20 million pounds of lentils. This ratio of goods is known as the price of trade between Glacier and Denali.

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

Note: Dashed drop lines will automatically extend to both axes.

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

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

True or False: Without engaging in international trade, Glacier and Denali 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:

Glacier has a comparative advantage in the production oflentils Correct , while Denali has a comparative advantage in the production ofcorn Correct . Suppose that Glacier and Denali specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of 60 million pounds of lentils and 60 Correct million pounds of corn.

Explanation

Because Glacier has a comparative advantage in the production of lentils, Glacier will produce 60 million pounds of lentils and 0 pounds of corn. Glacier exports 20 million pounds of lentils for 20 million pounds of corn. So, after trade, Glacier consumes 20 million pounds of corn as well as 40 million pounds of lentils.

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

Because Denali has a comparative advantage in the production of corn, Denali will produce 60 million pounds of corn and 0 pounds of lentils. Denali exports 20 million pounds of corn for 20 million pounds of lentils. So, after trade, Sylvania consumes 40 million pounds of corn as well as 20 million pounds of lentils.

True

False

Points:

1 / 1

Without engaging in international trade, any quantity outside a country's original PPF is considered infeasible. In other words, given an individual country's resources, the bundles on the PPF are the greatest quantities of the goods that a country can produce (and, therefore, consume) without trade. By exploiting each country's comparative advantage to realize gains from trade, Glacier and Denali can actually consume outside their individual PPFs through specialization.

Posted by Cleveland on August 29, 2024