Answered: Honduras's PPF Brazil's PPF 10,000…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter33: International Trade

Section: Chapter Questions

Problem 17CTQ: Are differences in geography behind the differences in absolute advantages?

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Question

The accompanying Production Possibilities Frontiers (PPF) represent hypothetical levels of production for Honduras and Brazil. Assume the two countries are initially producing and consuming in autarky at point A on each of their PPFs.

Suppose these countries decide to trade. Each country will specialize in the production of the good for which it has a comparative advantage.

a. What will each country produce?

a. Honduras will produce both goods.

b. Brazil will produce both goods.

c. Honduras will produce bananas and Brazil steel.

d. Honduras will produce steel and Brazil bananas.

b. Suppose each country specializes in the production of the good for which it has a comparative advantage, and they trade at a price of of 4,000 tons of steel for 6,000 tons of bananas. Place the points labeled "Post Trade Consumption" to show the amounts of bananas and steel each country will have to consume after they trade.

(look at image)

Honduras's PPF
Brazil's PPF
10,000
10,000
9,000
9,000
Post Trade Consumption
Post Trade Consumption
8,000
8,000
7,000
7,000
శ్రింద
5,000
5,000
,000
,000
4,000
1,000
3,000
3,000
2,000
2,000
1,000
1,000
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Steel (in tons)
Steel (in tons)
A,
(stfoj uiyseurut
(stfoj uiyseue

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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