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Opportunity Cost Candonia and Desonia

As observed from the PPF for Candonia, it can produce either36 million...
Course

International Economics (DEL-BUSECO-015)

101 Documents
Students shared 101 documents in this course
Academic year: 2013/2014
Listed booksEssentials of EconomicsInternational EconomicsAdvanced International Trade : Theory and EvidenceNati sotto Saturno. La figura dell'artista dall'antichità alla Rivoluzione francese
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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 above graphs show the production possibilities frontiers (PPFs) for Candonia and Desonia. Both countries produce potatoes and coffee, each initially i., 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.

Candonia has a comparative advantage in the production of potatoes , while Desonia has a comparative advantage in the production of coffee. Suppose that Candonia and Desonia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of 36 million pounds of potatoes and 36 million pounds of coffee.

Explanation:

As observed from the PPF for Candonia, it can produce either 36 million pounds of potatoes and 18 million pounds of coffee

Opportunity cost of 1 pound of potatoes = 18/36 = 0 pounds of coffee

Alternatively, opportunity cost of 1 pound of coffee = 36/18 = 2 pounds of potatoes

Similarly, we can calculate the opportunity cost of producing one pound of potatoes in terms of pound of coffee. We summarize the opportunity costs in the following table

Opportunity Cost of 1 pound of potatoes

Opportunity Cost of 1 pounds of coffee

Candonia 0 pounds of coffee 2 pound of potatoes Desonia = 36/24 = 1 pounds of coffee = 24/36 = 0 pound of potatoes Since Candonia can produce potatoes at a lower opportunity cost than Desonia can (0 < 1), Candonia has comparative advantage in potatoes**.** Since Desonia can produce coffee at a lower opportunity cost than Candonia can (0 < 2), Desonia has comparative advantage in coffee.

After specialization, Candonia produces only potatoes and Desonia produes only coffee.

Total potatoes produced = 36 million pounds

Total coffee produced = 36 million pounds

Suppose that Candonia 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 12 million pounds of potatoes for 12 million pounds of coffee. This ratio of goods is known as the price of trade between Candonia and Desonia.

(c) Candonia exports 12 million pounds of potatoes and imports 12 million pounds of coffee.. Desonia exports 12 million pounds of coffee. and imports 12 million pounds of potatoes.

For Candonia,

Consumption before trade = 18 million pounds of potatoes + 9 million pounds of coffee

Consumption after trade = 24 million pounds of potatoes (= 36 produced - 12 exported) + 12 million pounds of coffee imported

For Desonia,

Consumption before trade = 18 million pounds of potatoes + 9 million pounds of coffee

Consumption after trade = 24 million pounds of coffee (= 36 produced - 12 exported) + 12 million pounds of potatoes imported

Graph of Candonia's and Desonia’s consumption after trade is done below.

The following graph shows the same PPF for Desonia as before, as well as its initial consumption at point A. As we did for Candonia, we place a black point (plus symbol) on the following graph to indicate Desonia's consumption after trade in panel B.

True or False:

Without engaging in international trade, Candonia and Desonia would have been able to consume at the after-trade consumption bundles.

Sol: False

Explanation:

As seen from above graphs, the consumption bundles attained after trade lie outside the PPF for both countries, which could not be attained before trade. Hence, it is false that without engaging in international trade, Candonia and Desonia would have been able to consume at the after-trade consumption bundles

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Opportunity Cost Candonia and Desonia

Course: International Economics (DEL-BUSECO-015)

101 Documents
Students shared 101 documents in this course

University: University of Delhi

Was this document helpful?
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 above graphs show the production possibilities frontiers (PPFs) for Candonia and
Desonia. 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.
Candonia has a comparative advantage in the production of potatoes, while Desonia has a
comparative advantage in the production of coffee. Suppose that Candonia and Desonia
specialize in the production of the goods in which each has a comparative advantage. After
specialization, the two countries can produce a total of 36 million pounds of potatoes and 36
million pounds of coffee.
Explanation:
As observed from the PPF for Candonia, it can produce either36 million pounds of potatoes
and 18 million pounds of coffee
Opportunity cost of 1 pound of potatoes = 18/36 = 0.5 pounds of coffee
Alternatively, opportunity cost of 1 pound of coffee = 36/18 = 2 pounds of potatoes
Similarly, we can calculate the opportunity cost of producing one pound of potatoes in terms
of pound of coffee. We summarize the opportunity costs in the following table
Opportunity Cost of 1 pound of
potatoes
Opportunity Cost of 1 pounds of coffee

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