The Only Two Countries in the World, Alpha and Omega

question 33

Essay

The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
a.Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A.
b.If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
c.Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now?
d.If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

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Definitions:

Deflation

A decrease in the general price level of goods and services, often indicative of a reduction in the supply of money or credit in the economy.

Real Interest Rate

The interest rate recalibrated to factor in inflation, showcasing the real expense of borrowing or the legitimate profit from saving.

Nominal Interest Rate

The nominal interest rate, which reflects the raw rate of interest prior to being adjusted for inflation and represents the apparent value of financial dealings.

Market Basket

A selection of goods and services used to track price changes and inflation in an economy, representing the typical purchases made by consumers.