Question

The nation of Hillyland is initially​ self-sufficient in coffee and​ rice, and so is Flatland. Coffee grows best on hilly​ land, while rice grows best on flat land. Suppose each nation decides to specialize in the most suitable​ crop, and trade with the other nation for the other product. Discuss the​ trade-offs: who​ wins, who​ loses, and how long do the losses​ persist?

Answer 1

Answer:

Both Hillyland and Flatland will be better off in a win-win solution if they engage in comparative advantage.

Explanation:

Suppose each nation decides to specialize in the most suitable​ crop, and trade with the other nation for the other product, the trade-offs will be the products they supposedly can produce but do not have comparative advantage in. For Hillyland it will be rice and for Flatland it will be coffee.

When both nations practice comparative advantage there will be no losers because economic theory suggests that, when countries practice comparative advantage, the sum total of their combined output will be greater than if they had produced all products themselves because they wanted to be self sufficient.

The logic is simple, goods are less costly to produce in a country that has comparative advantage and at the end they could be sold cheaper to the country that traded it off.