Make this connection back to economics and Consider two countries: Alpha and Bet

Question

Make this connection back to economics and Consider two countries: Alpha and Beta. Beta is willing to open its markets up to Alpha and is interested in becoming a trading partner. Assume that Alpha has an absolute advantage in the production of both goods in a two good economy. Alpha also has a highly skilled labor force. In light of these observations, many Alphans are wary of outsourcing and believe they are better off producing all of their own products. Therefore many Alphans advocate for limiting trade with Beta. You are an economic advisor to the parliament of Alpha. What do you believe Alpha should do?

Explanation / Answer

Consider the following production capacity of Alpha and Beta when both countries produce soybean and corn only.

Soybeans-Alpha can produce 10 million bushels and Beta can produce 8 million bushels.

Corn-Alpha can produce 50 million bushles and Beta produces 25 million bushels.

It shows that Alpha has an absolute advantage in producing both the goods.However,Alpha should not produce produce both the crops.

Reason-Alpha can produce corn more efficiently than soybeans.Alpha opportunity cost of producing corn would be less in case it produces corn.It can then export the surplus to Beta and import soybean which it can produce less efficiently.

Comparative advantage refers to the ability of a country to produce a product at a lower opportunity cost than another country.

From the numbers,we can see that Beta has a comparative advantage in producing soybean which it can produce more efficiently and at a lower opportunity cost than Alpha.Therefore,Beta with specialization will produce soybean and export the surplus to Alpha and import corn while Alpha will only produce corn and export the surplus to Beta to import soybean.Thus,both countries will benefit from the trade.

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