Comparative Advantage in Production: Vietnam vs Ecuador

a. What is Vietnam's opportunity cost of producing one pound of rice?

A) 3 pounds of shrimp

b. What is Ecuador's opportunity cost of producing one pound of rice?

B) 5 pounds of shrimp

Answer:

a) 3 pounds of shrimp

b) 5 pounds of shrimp

In economics, the concept of opportunity cost refers to the value of the next-best alternative forgone when a decision is made to pursue a particular course of action. It helps in determining the comparative advantage that a country has in producing certain goods.

Vietnam can produce either 180,000 pounds of shrimp or 60,000 pounds of rice in a year. To calculate the opportunity cost of producing one pound of rice for Vietnam, we divide the quantity of shrimp that could be produced by the quantity of rice that could be produced:

Opportunity cost of producing one pound of rice for Vietnam = 180,000 ÷ 60,000 = 3 pounds of shrimp

On the other hand, Ecuador can produce 130,000 pounds of shrimp or 26,000 pounds of rice in a year. The opportunity cost of producing one pound of rice for Ecuador is calculated similarly:

Opportunity cost of producing one pound of rice for Ecuador = 130,000 ÷ 26,000 = 5 pounds of shrimp

Therefore, based on the principle of comparative advantage, Vietnam has a comparative advantage in producing rice compared to Ecuador. This is because Vietnam's opportunity cost of producing rice is lower than that of Ecuador, meaning Vietnam gives up less shrimp production to produce one pound of rice.