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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 Groundnuts and one unit of Fertilizer in Country A and Country B:

CountryGroundnuts (labor-hours)Fertilizer (labor-hours)
Country A48
Country B66

Based on the theory of comparative advantage, what is the opportunity cost of producing one unit of Fertilizer in Country A, and in which commodity should Country A specialize?

  1. 22 units of Groundnuts, and Country A should specialize in Groundnuts.Answer
  2. B
    0.50.5 units of Fertilizer, and Country A should specialize in Fertilizer.
  3. C
    22 units of Groundnuts, and Country A should specialize in Fertilizer.
  4. D
    0.50.5 units of Groundnuts, and Country A should specialize in Groundnuts.

Answer

The opportunity cost of producing one unit of Fertilizer in Country A is 22 units of Groundnuts, and Country A should specialize in producing Groundnuts.
In an input model specifying labor-hours, Country A needs 88 hours to produce 11 unit of Fertilizer. In those same 88 hours, Country A could have produced 84=2\frac{8}{4} = 2 units of Groundnuts. Thus, the opportunity cost of 11 unit of Fertilizer in Country A is 22 units of Groundnuts. Furthermore, Country A's opportunity cost for Groundnuts is only 0.50.5 units of Fertilizer, which is lower than Country B's opportunity cost of 11 unit of Fertilizer for Groundnuts. Therefore, Country A has a comparative advantage in Groundnuts and should specialize in its production.

Step-by-Step Solution

1
Calculate the opportunity cost of Fertilizer in Country A using input labor-hours.
Opportunity cost of 11 unit of Fertilizer = Labor-hours for FertilizerLabor-hours for Groundnuts=84=2\frac{\text{Labor-hours for Fertilizer}}{\text{Labor-hours for Groundnuts}} = \frac{8}{4} = 2 units of Groundnuts.
Input-based models measure opportunity cost by how much alternative output could be produced with the same labor-hours.
2
Calculate the opportunity cost of Groundnuts in Country A.
Opportunity cost of 11 unit of Groundnuts = 48=0.5\frac{4}{8} = 0.5 units of Fertilizer.
This determines Country A's relative sacrifice when producing Groundnuts.
3
Compare opportunity costs between Country A and Country B to determine comparative advantage.
Country B's opportunity cost of Groundnuts is 66=1\frac{6}{6} = 1 unit of Fertilizer. Since Country A's opportunity cost of Groundnuts (0.50.5 Fertilizer) is lower than Country B's (11 Fertilizer), Country A has a comparative advantage in Groundnuts.
A country should specialize in the commodity for which it has a lower opportunity cost.

Key Concept

Theory of Comparative Advantage and Opportunity Cost in Input-Based Models
Estimated Time:1m 30s
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Topics

Theories of International Trade (Absolute and Comparative Advantage)

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