Answered: When a country has a comparative…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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

Freedonia has a comparative advantage in the production of ________ , while Desonia has a comparative advantage in the production of _______ . Suppose that Freedonia and Desonia 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 tea and__________ million pounds of lemons.

Suppose that Freedonia and Desonia 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 tea. This ratio of goods is known as the price of trade between Freedonia and Desonia.

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.

True or False: Without engaging in international trade, Freedonia and Desonia 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.)

Freedonia
Desonia
64
64
56
56
48
PPF
48
40
40
32
+
32
24
+
24
PPF
16
16
8 16
LEMONS (Millions of pounds)
24 32 40
48
56
64
16
24
32 40
48
56
64
LEMONS (Millions of pounds)
TEA (Millions of pounds)
TEA (Millions of pounds)

Freedonia
64
56
Consumption After Trade
48
PPF
40
32
24
16
A
16
24
32
40
48
56
64
LEMONS (Millions of pounds)
TEA (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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