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Question: 4 specialization and trade when a country has a comparative...

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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 Freedonia and Desonia. Both countries produce lemons and sugar, each initially (i.e., before specialization and trade) producing 6 million pounds of lemons and 3 million pounds of sugar, as indicated by the grey stars marked with the letter A Freedonia 16 16 14 14 12 PPF 12 10 10 0 246810 12 14 16 LEMONS (Millions of pounds) 0 24681012 14 16 LEMONS (Millions of pounds) Freedonia has a comparative advantage in the production of production of comparative advantage. After specialization, the two countries can produce a total of while Desonia has a comparative advantage in the . Suppose that Freedonia and Desonia specialize in the production of the goods in which each has a million pounds of sugar and million pounds of 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 6 million pounds of lemons for 6 million pounds of sugar. 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 Freedonias consumption after trade. Note: Dashed drop lines will automatically extend to both axes.

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