Current level of Production of Spain:
Grapes = 6 million tons
Lemons = 0.6 million
For Argentina
Grapes = 3 million tons
Lemons = 1 million tons
Spain can only produce up to 12 million tons of grapes or 1.2 million tons of lemons if it devotes all of its resources to the production of one crop.
Similar to Argentina, which can only produce a maximum of 5.5 million tons of grapes or 2.2 million tons of lemons if all of its resources are dedicated to the production of only one good.
By comparing the output of Spain and Argentina, we may conclude that Argentina produces more lemons while Spain produces more grapes, both of which have absolute and comparative advantages.
Terms of trade is given as,
1 million tons of Grapes = 0.2 million tons of Lemons
i.e., Exported from Spain to Argentina = 4 million tons of grapes
Spain will have in return = 0.2*4=0.8 million tons of Lemons
Spain will have 8 million tons of grapes and 0.8 million tons of lemons after trading their bundle of products.
4 million tons of grapes and 1.4 million tons of lemons will be produced in Argentina.
Both of these bundles will be located on the PPF's right side. Therefore, we might conclude that trade benefits both nations.
Therefore, it makes sense for Spain to just grow grapes and for Argentina to only produce lemons when the two nations trade.
<h3>What is production possibility frontier?</h3>
When two products employ the same scarce resource in their manufacture, the production possibility frontier (PPF), a curve, is used in business analysis to represent the possible output of the two products. PPF also has a significant role in economics.
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Correct question:
The graphs below show the production possibilities frontiers for grapes and lemons in spain and argentina, with their current level of production marked as points a and b. spain and argentina are trading partners, where the terms of trade are 1 million tons of grapes = 0.2 million tons of lemons or 1 million tons of lemons = 5 million tons of grapes. each year, 4 million tons of grapes are exported.
