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7. Specialization and trade When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other The following graphs show the production possibilities frontiers (PPFs) for Candonia and Lamponia. 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. Lamponia S6 S6 48PPF 48 32 32 24 24 PPF 16 16 0 16 24 32 404 6 64 0 16 24 32 404 6 64 GRAIN (Millins of pounds) GRAIN (Millins of pounds) Candonia has a comparative advantage in the production of production of comparative advantage. After specialization, the two countries can produce a total of grain. ▼ , while Lam ponia has a comparative advantage in the , suppose that Candonia and Lamponia specialize in the production of the goods in which each has a million pounds of tea and million pounds of Suppose that Candonia and Lamponia 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 24 million pounds of grain for 24 million pounds of tea. This ratio of goods is known as the terms of trade between Candonia and Lamponia. The following graph shows the same PPF for Candonia as before, as well as its initial consumption at point A. Place a black point (cross symbol) on the graph to indicate Candonias consumption after trade Note: Dashed drop lines will automatically extend to both axes.

Candonia 58 Consumption After Trade 16 0 18 24 32 404858 64 GRAIN (Millions of pounds) The following graph shows the same PPF for Lamponia as before, as well as its initial consumption at point A. As you did for Candonia, place a black point (cross symbol) on the following graph to indicate Lamponias consumption after trade Lamponia Consumption After Trade 40 32 24 PPF 16 0818 24 32 4048 56 64 GRAIN (Millons of pounds) True or False: Without engaging in international trade, Candonia and Lamponia 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.)

1) True

2) False

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