Domestic opportunity cost of production possibilities tables

Question

Hypothetical production possibilities tables for New Zealand and Spain are given below

 

Employing a graph, draw the production possibilities data for each of the two countries. Referring to graphs, Find out:

(a) Each country's domestic opportunity cost of generating plums and apples.

(b) Which nation has to specialize in which product.

(c) The trading possibilities lines for each of the nation if the real terms of trade are 1 plum for 2 apples.

(d) Profit after trade.

 

Answer 1

(a) New Zealand’s cost ratio is 1 plum = 4 apples (or 1 apple = 1/4 plum). Spain’s cost ratio is 1 plum = 1 apple (or 1 apple = 1 plum). Illustrates in the below graphs.

(b) New Zealand has to specialize in apples, Spain in plums.

(c)  The trading possibilities lines for each of the nation if the real terms of trade are 1 plum for 2 apples is described in graph below

(d) Net production before specialization & trade: 40 apples (20 + 20) and 50 plums (10 + 40). After specialization & trade: 60 apples & 60 plums. Gain will be 20 apples and 10 plums.