Question

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 1,000 bags of rice OR 3,000 bags of tea. Let's also assume that, using all her resources efficiently, Kenya can produce either 1,000 bags of rice OR 1,000 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 400 bags of rice and 1,800 bags of tea, and in the no-trade situation, Kenya was consuming 500 bags of rice and 500 bags of tea.

Now, let's play a fun game called the "Trading Game" to figure out whether there is any benefit (in terms of increased consumption possibilities) for these two countries if they trade with each other. You are given the following information to start the "Trading Game". The trading price is set at one bag of rice for two bags of tea, and Kenya wishes to keep at least 550 bags of rice after trade.

Apply your knowledge of opportunity cost to identify the comparative advantage enjoyed by each country. Now using your knowledge of specialization and trade, show in a multi-paragraph essay, that the two countries can benefit by consuming more of both goods after trade.

Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English.

Answer 1

ANSWER First assume that Sri Lanka can produce either 1000 bag of rice or 3000 bags of tea by using all resource .so if Sri Lanka produce 1000 bag of rice then its opportunity cost would be 3000 bags of tea ,opportunity cost means the cost of any good is the next best alternative good that is sacrificed.If Sri Lanka produced 3000 bags of tea then its opportunity cost would be 1000 bag of rice .so it would be benefit for SriLanka to produce 3000 bags of tea because its having less opportunity cost than another case.But there is no trade off so sri Lanka produced both good and was consuming 400 bags of rice and 1800 bags of tea. Let s another assume that Kenya can produced either 1000 bags of rice or 1000 bags of tea by using all resources .If Kenya produced 1000 bags of rice then its opportunity cost would be 1000 bags of tea and vice versa.There is no trade so Kenya produce both good and was consuming 500 bags of rice and 500 bags of tea . Now the question is that whether there is any benefit for these two countries if they trade with each other .The answer is that yes both are countries would get benefit if trade take place .Because Sri Lanka has comparative advantage if he produce 3000 bags of tea and Kenya has comparative advantage if she produce 1000 bags of rice .The price is set 1 bag of rice =2 bag of tea .kenya wants to keep 550 bags of rice after trade ,so Kenya produce 1000 bag of rice out of 550 bag of rice keep left..

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As we compare the opportunity costs of producing tea in the two countries, Sri Lanka has a comparative advantage in the production of tea and Kenya has a comparative advantage in production of rice. The opportunity cost for 100 bags of rice in Sri Lanka is 300 bags of tea. While in Kenya the opportunity cost of 100 bags of rice is 100 bags of tea. On the other hand, the opportunity cost of 100 bags of tea in Sri Lanka is 33.5 bags of rice. In Kenya 100 the opportunity cost of 100 bags of tea is 100 bags of rice.