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 Maldonia and Lamponia. Both countries produce potatoes and coffee, each initially (i.e., before specialization and trade) producing 18 million pounds of potatoes and 9 million pounds of coffee, as indicated by the grey stars marked with the letter A.

Maldonia has a comparative advantage in the production of (potatoes, coffee, neither potatoes nor coffee, both potatoes and coffee) , while Lamponia has a comparative advantage in the production of (potatoes, coffee, neither potatoes nor coffee, both potatoes and coffee). Suppose that Maldonia and Lamponia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of (what number?) million pounds of potatoes and( what number?) million pounds of coffee.

Suppose that Maldonia 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 12 million pounds of potatoes for 12 million pounds of coffee. This ratio of goods is known as the terms of trade between Maldonia and Lamponia.

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.

Dashed drop lines will automatically extend to both axes.

The following graph shows the same PPF for Lamponia 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 Lamponia's consumption after trade.

True or False: Without engaging in international trade, Maldonia and Lamponia would have been able to consume at the after-trade consumption bundles.

Transcribed Image Text:

(spunod) COFFEE (Millions 48 42 36 30 24 18 PPF 12 6 0 0 T 1 Maldonia 6 12 18 24 30 36 42 POTATOES (Millions of pounds) 48 ? COFFEE (Millions of pounds) 48 42 36 PPF 30 24 18 12 6 0 0 Lamponia 6 12 18 24 30 36 42 48 POTATOES (Millions of pounds) COFFEE (Millions of pounds) 48 42 36 30 24 18 PPF 12 6 O 06 Maldonia 12 18 24 30 36 POTATOES (Millions of pounds) 42 48 + Consumption After Trade COFFEE (Millions of pounds) 48 42 36 PPF 30 24 18 12 6 0 Lamponia 06 12 18 24 30 36 POTATOES (Millions of pounds) 42 48 Consumption After Trade (spunod) COFFEE (Millions 48 42 36 30 24 18 PPF 12 6 0 0 T 1 Maldonia 6 12 18 24 30 36 42 POTATOES (Millions of pounds) 48 ? COFFEE (Millions of pounds) 48 42 36 PPF 30 24 18 12 6 0 0 Lamponia 6 12 18 24 30 36 42 48 POTATOES (Millions of pounds) COFFEE (Millions of pounds) 48 42 36 30 24 18 PPF 12 6 O 06 Maldonia 12 18 24 30 36 POTATOES (Millions of pounds) 42 48 + Consumption After Trade COFFEE (Millions of pounds) 48 42 36 PPF 30 24 18 12 6 0 Lamponia 06 12 18 24 30 36 POTATOES (Millions of pounds) 42 48 Consumption After Trade

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There are two countries M and L In country M the opportunity cost of producing potatoes in terms of ... View the full answer