Opportunity Cost and Comparative Advantage
Essay Topic: Here are some hypothetical numbers used to illustrate the ideas of trade-offs, specialization, and comparative advantage. Assume Sri Lanka, using all her resources efficiently, can produce either 2,000 bags of rice OR 6,000 bags of tea. Let’s also assume that, using all her resources efficiently, Kenya can produce either 2,000 bags of rice OR 2,000 bags of tea. Further, assume that the countries have similar resource endowments and that, initially, they are not trading with each other. Therefore, each of the countries has to produce both rice and tea for its citizens. Suppose that, in the no-trade situation, Sri Lanka was consuming 800 bags of rice and 3,200 bags of tea, and in the no-trade situation, Kenya was consuming 1,000 bags of rice and 1,000 bags of tea. The trading price is set at one bag of rice for two bags of tea, and Kenya wishes to keep at least 1,100 bags of rice after trade. Refer to my Module 8 notes on the production possibilities curve and how comparative advantage is the basis for trade. For the prompt, Determine if there is any benefit (in terms of increased consumption possibilities) for Sri Lanka and Kenya if they trade with each other. Requirements: Apply your knowledge of opportunity cost to identify the comparative advantage enjoyed by each country. Now using your knowledge of specialization and trade, show that the two countries can benefit by consuming more of both goods after trade. Develop a multi-paragraph response with a introduction, main section, and conclusion that includes examples and evidence to support your ideas. Organize your response in a clear and logical manner using proper economic reasoning. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English. The response must be in your own words. Do not use quotes or references. You must properly use economic concepts and terms. Identify the basic principles of economics and explain how opportunity cost determines comparative advantage. Apply the concepts of opportunity cost and marginal analysis to make decisions that gain comparative advantage. PAPER MUST BE 1,200 WORDS!