AP® Macroeconomics · Free response

Two countries, one PPC each: opportunity cost, comparative advantage and terms of trade

write it first, then score yourself point by point

Short free-response question · four-function calculator · 5 points · about 12 minutes

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The question

Name: ______________________   Date: ____________   Two countries, one PPC each: opportunity cost, comparative advantage and terms of trade (5 points)

Kestria and Lomar are two invented countries that each produce corn and fabric. The table shows the most corn or the most fabric one worker in each country can produce in a day; each country faces a constant opportunity cost.

Data

Corn and fabric in Kestria and Lomar

The most corn or fabric one worker can produce in a day in two invented countries, Kestria and Lomar. Each country faces a constant opportunity cost.
CountryCorn (bushels per worker per day)Fabric (bolts per worker per day)
Kestria3612
Lomar2010

  1. (A) Draw a correctly labeled production possibilities curve for one Kestria worker, with corn on the horizontal axis and fabric on the vertical axis, showing the most of each good the worker can produce. Plot a point U that shows the worker's output on a day when the worker is idle for part of the day. [2 points]

  2. (B) Calculate Lomar's opportunity cost of producing one bolt of fabric, in bushels of corn. Show your work. [1 point]

  3. (C) Identify the country that has the comparative advantage in producing corn. Explain using opportunity costs. [1 point]

  4. (D) Suppose Kestria and Lomar specialize and trade at 1 bolt of fabric for 2.5 bushels of corn. Will both countries gain from this trade? Explain. [1 point]