Specialization and Trade Between Vietnam and Ecuador
What are the production capabilities of Vietnam and Ecuador?
Vietnam can produce 80 thousand pounds of shrimp or 40 thousand bushels of wheat in a year. Ecuador can produce 60 thousand pounds of shrimp or 20 thousand bushels of wheat in a year. What are their opportunity costs?
Production Capabilities and Opportunity Costs
Based on the data, Vietnam can produce either 80 thousand pounds of shrimp or 40 thousand bushels of wheat. This means that for every 1 pound of shrimp Vietnam produces, it gives up 0.5 bushels of wheat. Ecuador, on the other hand, can produce either 60 thousand pounds of shrimp or 20 thousand bushels of wheat. This implies that for every 1 pound of shrimp Ecuador produces, it sacrifices 0.33 bushels of wheat.
Explanation of Production Capabilities and Cost
In economics, opportunity cost refers to the benefit that a person or country could have gained from choosing the next best alternative. In this case, Vietnam’s opportunity cost of producing one bushel of wheat is 2 pounds of shrimp, while Ecuador’s opportunity cost of producing one bushel of wheat is 3 pounds of shrimp.
When deciding on what to produce, countries often consider their opportunity costs to determine comparative advantage. Vietnam has a comparative advantage in producing wheat because it has a lower opportunity cost of producing wheat compared to Ecuador. Similarly, Ecuador has a comparative advantage in producing shrimp.
By specializing in their respective comparative advantage products, Vietnam can focus on producing wheat more efficiently, while Ecuador can concentrate on shrimp production. This specialization allows both countries to trade with each other, benefiting from their differences in opportunity costs and maximizing overall production.
Trade between Vietnam and Ecuador can lead to mutual gains as each country can exchange goods they produce most efficiently. This specialization and trade can lead to increased economic welfare for both countries by exploiting their comparative advantages and effectively utilizing available resources.