Assume that Colombia can produce 1,000 pounds of coffee in one day or produce 200 pounds of bananas in one day. In addition, assume that Ecuador can produce 300 pounds of coffee in one day or produce 100 pounds of bananas in one day. Which country has
the comparative advantage in coffee and which has the comparative advantage in bananas? Determine a pattern of trade regarding these countries and these goods that would benefit both countries.
Colombia has the comparative advantage in coffee because its opportunity cost of one pound of coffee is only 0.2 pounds of bananas while Ecuador's is 0.33 pounds of bananas. Ecuador has the comparative advantage in bananas because its opportunity cost of one pound of bananas is only three pounds of coffee while Colombia's is five pounds of bananas. If Ecuador traded one pound of bananas to Colombia for between three and five pounds of coffee, both countries could enjoy greater consumption and be better off.
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Indicate whether the statement is true or false
The gains from consumer surplus and producer surplus occur when
A) both consumers and producers engage in voluntary exchange. B) consumers are willing to buy a good but producers are not willing to provide it. C) producers are willing to provide a good but consumers are not willing to pay for it. D) the government supplies the good instead of firms.