Two countries Nicaragua and Argentina can both produce banan

Two countries, Nicaragua and Argentina can both produce bananas and wheat. Their production possibility frontiers are shown below. Based on this we can say that Nicaragua has a comparative advantage in producing__________. Both countries can gain from trade if Nicaragua produces___________ and Argentina produces __________ and trade.

Bananas; bananas; wheat.

Wheat (millions of bushels 1) 120 per year) Argentina 10 Nicaragua 15. 30 Bananas (thousands of tons per year)

Solution

Two countries, Nicaragua and Argentina can both produce bananas and wheat. Their production possibility frontiers are shown below. Based on this we can say that Nicaragua has a comparative advantage in producing_____Bananas;_____. Both countries can gain from trade if Nicaragua produces_____Bananas;______ and Argentina produces _____wheat_____ and trade.

Nicaragua is producing more of Banana in comparison of Wheat in his own county. It has a comparative advantage in producing more of Banana then Wheat. Similarly Argentina has a more advantage in producing Wheat then Banana in his own country. If we see Argentina has more resources to produce more of wheat & banana in comparison to Nicaragua. But given a choice of trade Aregntina can use resources deployed in producing Banana in Wheat & can produce more of Wheat in a year. Similarly Nicaragua can utilize its entire resources in producing more of Banana then Wheat & can trade off.