Vietnam and Ecuador: Comparative Advantage in Shrimp and Rice Production
a. What is Vietnam's opportunity cost of producing one pound of rice?
a. 2 pounds of shrimp
b. What is Ecuador's opportunity cost of producing one pound of rice?
b. 6 pounds of shrimp
c. Based on the data, what is the trade agreement between Vietnam and Ecuador?
c. Vietnam specializes in producing rice and will sell one pound of rice for no less than 3 pounds of shrimp. Ecuador specializes in producing shrimp and will pay no more than 5 pounds of shrimp for one pound of rice.
a. Vietnam's Opportunity Cost:
To produce one pound of rice, Vietnam must give up the production of 2 pounds of shrimp. Vietnam can produce 130,000 pounds of shrimp or 65,000 pounds of rice in a year. Therefore, the opportunity cost of producing one pound of rice is 2 pounds of shrimp.
b. Ecuador's Opportunity Cost:
To produce one pound of rice, Ecuador must give up the production of 6 pounds of shrimp. Ecuador can produce 150,000 pounds of shrimp or 25,000 pounds of rice in a year. Thus, the opportunity cost of producing one pound of rice is 6 pounds of shrimp.
c. Trade Agreement between Vietnam and Ecuador:
Given that Vietnam has a comparative advantage in producing rice while Ecuador excels in producing shrimp, the two countries decide to specialize and trade with each other. Vietnam will sell one pound of rice for no less than 3 pounds of shrimp, and Ecuador will pay no more than 5 pounds of shrimp for one pound of rice. By focusing on their strengths and engaging in trade, both countries can benefit from increased efficiency and access to goods at a lower cost.
Comparative advantage plays a crucial role in international trade, allowing countries to specialize in producing goods in which they excel and trade with one another for mutual benefit. In the case of Vietnam and Ecuador, understanding their opportunity costs enables them to make informed decisions on specialization and trade agreements. Vietnam's Advantage:
Vietnam's opportunity cost of producing one pound of rice is 2 pounds of shrimp, indicating that it is more efficient in rice production compared to Ecuador. By specializing in rice production and exporting it to Ecuador, Vietnam can maximize its output and benefit from trading for goods it is less efficient in producing. Ecuador's Advantage:
On the other hand, Ecuador's opportunity cost of producing one pound of rice is 6 pounds of shrimp, highlighting its comparative advantage in shrimp production. By focusing on shrimp production and importing rice from Vietnam, Ecuador can optimize its resources and increase overall economic output. Trade Agreement Impact:
The trade agreement between Vietnam and Ecuador, where Vietnam sells rice for a minimum of 3 pounds of shrimp and Ecuador buys rice for a maximum of 5 pounds of shrimp, reflects the comparative advantages of each country. By engaging in this trade, both nations can enhance economic efficiency and access goods at competitive prices. In conclusion, by leveraging their respective strengths in shrimp and rice production, Vietnam and Ecuador can foster economic growth through specialization and trade. By working together and capitalizing on their comparative advantages, these countries can create a mutually beneficial trading relationship that enhances overall prosperity.