You are the Minister of Trade for a small island country in

You are the Minister of Trade for a small island country in the South Pacific with the annual production possibilities curve depicted below on the left. You are negotiating a deal with a neighboring island that has the annual PPC depicted below on the right:

Country 1: 500 Coconuts 1500 Fish Country 2: 500 Coconuts 2500 Fish

Suppose both countries specialize exclusively in the product for which they have a comparative advantage. You borh agreed to sell 350 coconutes in exchange for 1300 fish. How much each country consumes of each product after the trade?

Solution

From the above PPC. For country 1 which is our country can produce 1500 fish while on the other hand that is our neighboring country is producing 2500 fish . And production of coconuts is same in both islands.

Agreement-is to sell 350 coconutes in exchange for 1300 fish.

It is clear from the above information that neighbor country has comparative advantage in fish so he will export 1300 fish out of 2500 and consumes 1200 domestically and receives 350 coconuts in exchange.After trade the neighbor country has total of 350 coconuts and 1200 fish

country 1 receives or impot 1300 fish and export 350 out of 500 coconuts. it means that country 1 in total after trade have 1300 fish and 150 coconuts