Question

Egypt and Russia are both producers of cotton and wool. The table below what each country can produce in one hour of each commodity.

	Cotton(bushels/hour)	Wool(bushels/hour)
Egypt	8	1
Russia	2	10

1. What is the opportunity cost in the Egypt of producing 1 bushel of cotton vs. wool?

2. What is the opportunity cost in the Egypt of producing 1 bushel of wool vs. cotton?

3. What is the opportunity cost in the Russia of producing 1 bushel of cotton vs. wool?

4. What is the opportunity cost in the Russia of producing 1 bushel of wool vs. cotton?  

5. What should each country specialize in? Egypt ? , Russia ? .

WHY?

Answer 1

The opportunity cost of producing one unit of a commodity can be defined as the amount of other commodity that has to be given up to produce an addition unit of a commodity.

Egypt can produce 8 bushels of cotton or 1 bushel of wool in one hour.

Therefore to produce one unit of cotton, it has to given up 1/8 = 0.125 bushels of wool

Opportunity cost of producing one bushel of cotton in Egypt = 0.125 bushels of wool

To produce one bushel of wool, Egypt has to given up 8 bushels of cotton

Opportunity cost of producing one bushel of wool in Egypt = 8 bushels of cotton

Russia can produce 2bushels of cotton or 10 bushels of wool using one hour.

To produce one bushel of cotton, Russia has to given up 10/2 = 5 bushels of wool

Opportunity cost of producing one bushel of cotton in Russia = 5 bushels of wool

To produce 10units of wool, Russia has to given up 2/10 = 0.2 bushels of cotton

Opportynity cost of producing one bushel of wool in Russia = 0.2 bushels of cotton

According to the comparative cost advantage theory of international trade, each country should specialize in the production of those goods in which it has comparative advantage over other country. A country has comparative advantage in the production of one commodity over other country if it can produce the commodity at lower opportunity cost compared to the other country.

Egypt has lower opportunity cost in the production of cotton compared to Russia and Russia has lower opportunity cost in the production of wool compared to Egypt.

Therefore Egypt should specialize in the production of cotton and Russia should specialize in the production of wool.