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Production Possibilities Before and After Trade

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Plot the production possibilities data for each of the two countries separately. Referring to your graphs, answer the following:
a. What is each country's cost ratio of producing plums and apples.
b. Which nation should specialize in which product?
c. Show the trading possibilities lines for each nation if the actual terms of trade are 1 plum for 2 apples. (Plot these lines on your graph.)
d. Suppose the optimum product mixes before specialization and trade mere alternative B in New Zealand and alternative S in Spain. V/hat would be the gains from specialization and trade?

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Solution Preview

a) See the attached graphs. New Zealand's cost ratio is 1 plum to 4 apples (or 1 apple to 1/4 plum). Spain's cost ratio ...

Solution Summary

Production possibilities before and after trade and specialization for two countries are discussed in this solution.