Figure 34-7

In Figure 34-7, CF has the same slope as BG. AB and CD are the production possibilities of Pestoland and Pastaland, respectively. If both countries are given the opportunity to trade at prices indicated by CF,

Question

Figure 34-7 ​

In Figure 34-7, CF has the same slope as BG. AB and CD are the production possibilities of Pestoland and Pastaland, respectively. If both countries are given the opportunity to trade at prices indicated by CF,

Quizplus · Accepted Answer

Both countries will benefit from trade as they have different opportunity costs for producing different goods. Pestoland has a comparative advantage in producing goods along the AB line, while Pastaland has a comparative advantage in producing goods along the CD line. By specializing in the goods they are best at producing and then trading with each other, both countries can improve their economic welfare by consuming more goods than if they were producing everything on their own. Therefore, both countries will agree to trade.

Figure 34-7 ​ In Figure 34-7, CF Has the Same Slope as BG

Figure 34-7 In Figure 34-7, CF Has the Same Slope as BG