Question

Econ Land and the Republic of Trade produce spectacular corn and ridiculously fast phones as shown below.

	Phones/1 hour	Bushels of Corn/1 hour
Econ Land	10	40
Republic of Trade	20	60

Who has the comparative advantage in corn? Who has it in phones?

Answer 1

The opportunity costs can be defined as the lost units of output of other goods for producing an additional unit of output of a good. A country has comparative advantage in the production of that good in which it has lower opportunity cost. In Ricardo theory of comparative advantage the concept of the opportunity cost is very important for determination of the comparative advantage and gains from trade.

Econ Land Opportunity cost of phone =40/10

=4 Bushel of corn

Econ Land Opportunity cost of a bushel of corn =10/40

=0.25 phone

Republic of Trade Opportunity cost of phone =60/20

=3 Bushel of corn

Republic of Trade Opportunity cost of a bushel of corn =20/60

=0.33 apple

Since opportunity cost of phone production of Republic of Trade is less compare to Econ Land, so Republic of Trade has comparative advantage in the production of Phone.

Since opportunity cost of corn production of Econ land is less compare to Republic of Trade, so Econ land has comparative advantage in corn production.

Hence it can be said that Econ land has comparative advantage in the corn production while Republic of Trade has comparative advantage in the phone production.