Question

If Nicaragua can produce with the same amount of resources twice as much coffee as Colombia, explain how Colombia could have a comparative advantage in producing coffee.

Short answer

Colombia could have a comparative advantage in producing coffee if its opportunity cost of producing coffee is less than Nicaragua's, even if Nicaragua can produce more coffee.

Step-by-step solution

Identify Opportunity Cost for Each Country

Suppose that for the same amount of resources, Nicaragua can produce either twice as much coffee or some amount of another good, let's call it Good A. Similarly, Colombia can produce some amount of coffee or some amount of Good B. The opportunity cost of producing coffee in each country is what is given up to do so, which is the ability to produce the other good.

Compare Opportunity Costs

Suppose that producing a unit of Good A in Nicaragua costs a lot of resources, so the opportunity cost of producing coffee is high. In contrast, suppose that in Colombia, the resources could have been used to produce a high quantity of Good B. This means that Colombia has sacrificed less to produce coffee than what Nicaragua would have sacrificed.

Determine Comparative Advantage

Despite Nicaragua being able to produce more coffee, Colombia has a comparative advantage if its opportunity cost of producing coffee is less than Nicaragua's. This is because it sacrifices less in terms of other potential production to produce coffee.

Key concepts

Opportunity Cost

Opportunity cost refers to the value of the best alternative forgone when making a choice. In simpler terms, it represents what you sacrifice in order to pursue a particular option. For countries like Nicaragua and Colombia, this means what they give up when they decide to allocate resources to produce one good over another.

When Nicaragua and Colombia choose to produce coffee, they forego the opportunity to produce another good, which we refer to as Good A in Nicaragua and Good B in Colombia. This trade-off forms the basis of comparative advantage, a key concept in understanding international trade. Analyzing opportunity costs requires examining how much of Good A or Good B each country can no longer produce when choosing to focus on coffee production.

Even if one country, like Nicaragua, can produce more coffee than Colombia per unit of resource, it doesn't automatically grant them a comparative advantage. Instead, their opportunity cost in terms of Good A plays a more critical role. By examining these opportunity costs, countries can better determine which goods they can produce more efficiently compared to others.

International Trade

International trade allows countries to specialize in producing goods where they have a comparative advantage, thereby increasing overall world production and enhancing global economic welfare. When countries trade based on comparative advantage, they can exchange goods in a way that benefits all parties involved.

In the case of Nicaragua and Colombia, even though Nicaragua can physically produce more coffee with the same resources, international trade provides a platform through which Colombia can still have an advantage. By assessing the opportunity costs, Colombia might find that it benefits more economically from focusing on coffee production and trading with Nicaragua for other goods.

Thanks to international trade, both Nicaragua and Colombia can specialize in what they do best, minimizing costs and optimizing their production possibilities. This trade not only provides access to a wider variety of goods but also encourages efficiency and productivity through specialization.

Production Possibility Frontier

The Production Possibility Frontier (PPF) is a curve depicting the maximum feasible amounts of two goods that a country can produce given its resources and technology. It illustrates concepts such as opportunity cost, efficiency, and potential output.

For Nicaragua and Colombia, their individual PPFs represent different combinations of coffee and another good, like Good A or Good B, that they can produce with limited resources. If Nicaragua's PPF allows it to produce twice as much coffee as Colombia for the same input, it suggests high efficiency in coffee production. However, the PPF also shows us the trade-offs each country faces—specifically, what they must give up in terms of Good A and Good B to focus on coffee.

A country's decision to trade based on comparative advantage is influenced by its position on the PPF. By moving along the PPF, they can decide on the optimal mix of goods they want to produce and trade. Understanding how the PPF interacts with opportunity costs helps countries make strategic economic decisions that lead to greater abundance of goods and services through trade.