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

Solution:-

Hope its helps you...

• A country has comparative advantage in producing a good if opportunity cost of producing that good is lower in that country as compared to other country.

• Sri Lanka: 1,000 bags of rice = 3,000 bags of tea

Implies, 1 bag of rice = 3 bags of tea or 1 bag of tea = 1/3 bag of rice

This shows that to produce 1 bag of rice, Sri lanka has to sacrifice 3 bags of tea or to produce 1 bag of tea, country has to sacrifice 1/3rd bag of rice. Therefore, opportunity cost of 1 bag of rice is 3 bags of tea and 1 bag of tea is 1/3 bag of rice.

• Kenya: 1,000 bags of rice = 1,000 bags of tea

Implies, 1 bag of rice = 1 bag of tea

Opportunity cost of 1 bag of rice is 1 bag of tea and vice-versa.

Therefore, Kenya has comparative advantage in the production of rice while Sri Lanka has comparative advantage in the production of tea.

- So, Kenya will produce 1,000 bags of rice and Sri Lanka will produce 3,000 bags of tea. After trade, both countries will get 500 bags of rice and 1,500 bags of tea.