US’s opportunity cost of a papaya is 3 apples.
Mexico’s opportunity cost of a papaya is ½ an apple.
So Mexico has the lower opportunity cost of producing a papaya so Mexico should specialize in papayas, and this leaves the US to specialize in apples. With both countries producing only what they have their comparative advantage in, the world economy now has more stuff.
A total of 63 apples and 24 papayas, where as before, with each producing some of both goods, we had a total of 51 apples and 15 papayas. So by specializing, we got more of both goods!
|Production and Consumption before trade|
Now after specialization, we see that there are a total of 63 apples and 24 papayas in the economy. At this point what you do is arbitrary, but I think the first goal should be to allow the countries to consume what they were originally producing.
|Production and Consumption after trade|
Remember that starting and ending amounts are arbitrary, at this time in the semester we don’t know if the Mexico even likes apples, so these amounts will be given to you by the book or the problem. What you really need to know are the steps below:
1. Determine the opportunity costs of production.
2. Figure out who has the comparative advantage.
3. Have each country specialize in their comparative advantage.
4. Figure out an allocation that makes each country better off.