Maldonia has a comparative advantage in the production of _______ while Sylvania has a comparative advantage in the production of _______ .
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Question “Maldonia has a comparative advantage in the production of _______ while Sylvania has a comparative advantage in the production of _______ .”
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 Maldonia and Sylvania. Both countries produce grain and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of grain and 12 million pounds of tea, as indicated by the grey stars marked with the letter A.
Maldonia has a comparative advantage in the production of _______ while Sylvania has a comparative advantage in the production of _______ .Suppose that Maldonia and Sylvania 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 grain and _______ million pounds of tea.
Suppose that Maldonia and Sylvania 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 grain for 16 million pounds of tea. This ratio of goods is known as the price of trade between Maldonia and Sylvania.
The following graph shows the same PPF for Maldonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Maldonia’s consumption after trade.
Note: Dashed drop lines will automatically extend to both axes.
The following graph shows the same PPF for Sylvania as before, as well as its initial consumption at point A.
As you did for Maldonia, place a black point (plus symbol) on the following graph to indicate Sylvania’s consumption after trade.
True or False: Without engaging in international trade, Maldonia and Sylvania 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.)
True
False
Answer
Maldonia’s opportunity costs for the production Grains = 24/48=0.5 pounds of tea
Maldonia’s opportunity costs for tea production = 48/24= 2 lb of grains
Similar to the above, Sylvania’s opportunity costs for Grain production = 48/32 = 1.5 lbs of tea
Sylvania’s opportunity costs for Tea Production = 32/48 = 0.67 lbs of Grain
Maldonia has lower opportunities in the production and Sylvania has lower opportunities in the production.
This means that Maldonia is able to produce grain with a comparative edge, while Sylvania can produce tea with a comparative edge. Let’s say that each country is specialized in one of the goods for which it has a comparative advantage. The two countries could produce 48 million pounds total of tea (so Sylvania and 48 million tons of grain (so Maldonia) after achieving specialization.
Let’s say Sylvania and Maldonia agree to trade. They decide to trade 16 million pounds worth of grain for 16 millions pounds of tea.
Then,
MALDONIA | SYLVANIA | ||||
Grain (Millions upon Millions of Pounds) | Tea (Millions) | Grain (Millions upon Millions of Pounds) | Tea (Millions) | ||
Without trade | Production and consumption | 24 | 12 | 24 | 12 |
Trade | Production | 48 | 0 | 0 | 48 |
Trade | Export 16 | Import 16 | Import 16 | Export 16 | |
Consumption | (48-16)=32 | 16 | 16 | (48-16)=32 |
The following graphs can be obtained by plotting the consumption points after trade:
TRUE, because without engaging international trade – Maldonia and Sylvania wouldn’t have been able to consume after trade consumption point as it is outside the PPF.
Conclusion
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