You are the Minister of Trade for a small island country in the South Pacific with the following annual production possibilities curve: You are negotiating a deal with a neighboring island that has the following annual PPC: Refer to the figure above. Both islands specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell the other island 350 coconuts in exchange for 1,300 fish. After the trade the other island has a total of _____ coconuts and _____ fish.

Question

You are the Minister of Trade for a small island country in the South Pacific with the following annual production possibilities curve:  You are negotiating a deal with a neighboring island that has the following annual PPC:  Refer to the figure above. Both islands specialize exclusively in the product for which they have a comparative advantage. You have agreed to sell the other island 350 coconuts in exchange for 1,300 fish. After the trade the other island has a total of _____ coconuts and _____ fish.

Quizplus · Accepted Answer

To determine the post-trade quantities of coconuts and fish for the neighboring island, we need to find the points where their PPC intersects with the terms of trade (1,300 fish for 350 coconuts):

Neighboring island PPC: 2,600 fish or 650 coconuts
Our island PPC: 700 fish or 1,050 coconuts

Since they have a comparative advantage in fish, they will specialize in fish production and give up some of their fish to obtain coconuts from us. So they will produce and consume at point X, where their PPC intersects with the terms of trade line, which means they will produce 500 fish and trade 300 fish for 350 coconuts.

For our island, we will specialize in coconut production, producing and consuming at point Y, where our PPC intersects with the terms of trade line, which means we will produce 1,050 coconuts and trade 350 coconuts for 1,000 fish.

Therefore, after the trade, the neighboring island will have 350 coconuts and 1,200 fish.

You Are the Minister of Trade for a Small Island