(a) Sketch and label a diagram to illustrate comparative Advantage between Country X and Country Y.
(b) Outline the reason why Country X should specialize in the production of apples and Country Y should specialize in the production of bananas.
Country X should specialize in Apples because the opportunity cost is lower and because specialization will increase output (shift the PPC out) or this will increase its consumption possibilities/ increase (global) efficiency and may result in lower prices.
(c) Outline one reason why it might not be in the country’s best interest to specialize according to the principle of comparative advantage.
·Unemployment – workers might not be able to take advantage of areas of comparative advantage.
·Over-Specialization – resulting in vulnerability (lack of diversity in production of goods) to changes in market conditions or as barriers to economic development.
·Over-Reliance – on trading partners for essential products or resources, which might compromise national security (antibiotics) or diminish negotiating power.
·Safety – and environmental standards may be compromised by low-quality imports (hand sanitizer, dog food).
·Barriers – Specialization may not result in beneficial trade if barriers to trade protect export markets. (Any gains in specialization may be wiped out due to trade restrictions).
·Demand Conditions – deteriorate for exported goods the country’s terms of trade may be harmed.
·Slow Growth – due to overspecialization in good with low income elasticity of demand.
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