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 Desonia. Both countries produce potatoes and sugar, each initially (i.e., before specialization and trade) producing 12 million pounds of potatoes and 6 million pounds of sugar, as indicated by the grey stars marked with the letter A.
Candonia has a comparative advantage in the production of , while Desonia has a comparative advantage in the production of . 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 ofmillion pounds of sugar andmillion pounds of potatoes.
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 sugar. This ratio of goods is known as the terms of trade between Candonia and Desonia.
True or False: Without engaging in international trade, Candonia and Desonia 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.)