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 Yosemite and Rainier. Both countries produce corn and lentils, each initially (i.e., before specialization and trade) producing 6 million pounds of corn and 3 million pounds of lentils, as indicated by the grey stars marked with the letter A.
Yosemite has a comparative advantage in the production of ----- while Rainier has a comparative advantage in the production of --- . Suppose that Yosemite and Rainier 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 Yosemite and Rainier 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 4 million pounds of corn for 4 million pounds of lentils. This ratio of goods is known as the price of trade between Yosemite and Rainier.
The following graph shows the same PPF for Yosemite as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Yosemite's consumption after trade.
Note: Dashed drop lines will automatically extend to both axes.
What is the number of goods each country can produce after specialization.
What is the ratio for the price of trade?
True or False: Without engaging in international trade, Yosemite and Rainier would not have been able to consume at the after-trade consumption.
