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Difficulty: MediumTheories of International Trade (Absolute and Comparative Advantage)

The table below shows the input requirement in labor hours needed to produce one unit of Coffee and one unit of Electronics in Country X and Country Y:

CountryCoffee (labor hours)Electronics (labor hours)
Country X105
Country Y128

Based on David Ricardo's Theory of Comparative Advantage, what is the opportunity cost of producing one unit of Coffee in Country X, and which country possesses the comparative advantage in Coffee production?

  1. 22 units of Electronics; Country Y has a comparative advantage in Coffee.Answer
  2. B
    22 units of Electronics; Country X has a comparative advantage in Coffee.
  3. C
    0.50.5 units of Electronics; Country X has a comparative advantage in Coffee.
  4. D
    1010 labor hours; Country X has a comparative advantage in Coffee.

Answer

22 units of Electronics; Country Y has a comparative advantage in Coffee.
The opportunity cost of producing one unit of Coffee in Country X is calculated by taking the ratio of labor hours needed for Coffee to labor hours needed for Electronics: 10/5=210 / 5 = 2 units of Electronics. For Country Y, the opportunity cost of Coffee is 12/8=1.512 / 8 = 1.5 units of Electronics. Because Country Y sacrifices fewer units of Electronics per unit of Coffee produced (1.5<21.5 < 2), Country Y holds the comparative advantage in Coffee production.

Step-by-Step Solution

1
Calculate the opportunity cost of producing Coffee in Country X.
Opportunity Cost of 1 Coffee in Country X = Labor hours for CoffeeLabor hours for Electronics=105=2\frac{\text{Labor hours for Coffee}}{\text{Labor hours for Electronics}} = \frac{10}{5} = 2 units of Electronics.
Opportunity cost in input-based tables is calculated by dividing the input required for the target good by the input required for the alternative good.
2
Calculate the opportunity cost of producing Coffee in Country Y.
Opportunity Cost of 1 Coffee in Country Y = 128=1.5\frac{12}{8} = 1.5 units of Electronics.
This determines which country sacrifices less of the alternative commodity to produce one unit of Coffee.
3
Compare opportunity costs to determine comparative advantage.
Country Y has a lower opportunity cost (1.5<2.01.5 < 2.0) in Coffee production.
According to the Theory of Comparative Advantage, a country should specialize in the good for which it has a lower opportunity cost.

Key Concept

Theory of Comparative Advantage with Input Data
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Topics

Theories of International Trade (Absolute and Comparative Advantage)

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