Question

Can you all show me an specialization and production possibilities model and example?

Answer 1

Comparative Advantage/ Specialization model

Comparative cost advantage theory was formulated by Ricardo. This model of international trade is also referred as 2X2X1 model. It means that there are 2 countries producing 2 goods by using only one factor of production i.e. labor.

According to this theory, A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country. This approach in which international trade arises due to difference in productivity of labor is known as Ricardian Model of International Trade.

Let us assume that there are two countries, UK and India who produces rice and tea.

UK requires 4 and 5 units labor to produce 1 unit of tea and rice respectively. On the other hand, India requires 5 and 4 units of tea and rice respectively.

So, Opportunity cost in UK:

4 units of tea = 5 units of rice

implies, 1 unit of tea = 5/4 or 1.25 unit of rice or 1 unit of rice = 4/5 or 0.8 units of tea

Opportunity cost in India:

5 units of tea = 4 units of rice

implies, 1 unit of tea = 0.4 unit of rice or 1 unit of rice = 1.25 units of tea

Since, opportunity cost of producing tea is less in India, so India has comparative advantage in the production of tea. Opportunity cost of producing rice is less in UK so UK has comparative advantage in the production of rice.

It means India is specialised in the production of tea while UK is specialized in the production of rice.

Production possibilities model

PPC is a curve showing alternative production possibilities of two goods with the given resources and technique of production. It is also called production possibility boundary or production possibility frontier.

Production possibility curve shows different combination of two goods which can be produced with the given resources on the assumptions that (i) resources are fully and efficiently utilized, and (ii) technique of production remains constant.

In the above PPC, C is the unattainable combination of output. Combination A shows under-utilization or inefficient utilization of resources. Point on PPC i.e. B shows fuller utilization of resources.

PPC and Opportunity Cost:

Each point on PPC shows a combination of output of rice and wheat which can be produced with the given resources and given technology. Moving along the PPC from left to the right shows how much of rice is to be sacrificed for producing an additional unit of wheat. Thus, when we move from B to C, 4 units of rice are to be sacrificed for producing 2 more units of wheat. Implying that 2 units of rice are to be sacrificed for producing one more unit of wheat (moving from B to C).