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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 Yosemite and Rainier. Both countries produce almonds and pistachios, each initially $($i$.$e$.,$ before specialization and trade$)$ producing $24$ million pounds of almonds and $12$ million pounds of pistachios, as indicated by the grey stars marked with the letter A$.$

Yosemite

$0$

$8$

$16$

$24$

$32$

$40$

$48$

$56$

$64$

$64$

$56$

$48$

$40$

$32$

$24$

$16$

$8$

$0$

PISTACHIOS $($Millions of pounds$)$

ALMONDS $($Millions of pounds$)$

PPF

A

Rainier

$0$

$8$

$16$

$24$

$32$

$40$

$48$

$56$

$64$

$64$

$56$

$48$

$40$

$32$

$24$

$16$

$8$

$0$

PISTACHIOS $($Millions of pounds$)$

ALMONDS $($Millions of pounds$)$

PPF

A

Yosemite has a comparative advantage in the production ofpistachios $,$ while Rainier has a comparative advantage in the production ofalmonds $.$ 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 pistachios and

million pounds of almonds.

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 $24$ million pounds of almonds for $24$ million pounds of pistachios. 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.

Yosemite

Consumption After Trade

$0$

$8$

$16$

$24$

$32$

$40$

$48$

$56$

$64$

$64$

$56$

$48$

$40$

$32$

$24$

$16$

$8$

$0$

PISTACHIOS $($Millions of pounds$)$

ALMONDS $($Millions of pounds$)$

PPF

A

The following graph shows the same PPF for Rainier as before, as well as its initial consumption at point A$.$

As you did for Yosemite, place a black point $($plus symbol$)$ on the following graph to indicate Rainier's consumption after trade.

Rainier

Consumption After Trade

$0$

$8$

$16$

$24$

$32$

$40$

$48$

$56$

$64$

$64$

$56$

$48$

$40$

$32$

$24$

$16$

$8$

$0$

PISTACHIOS $($Millions of pounds$)$

ALMONDS $($Millions of pounds$)$

PPF

A

True or False: Without engaging in international trade, Yosemite and Rainier would 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

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