Question

Sri Lanka 1000 rice 3000 ten Kenya 1000 rice 1000 Tea production consuming 400 rice 1800 tea 500 rice కాలం tee Is there any benefit if they trade with each other? teading price - I bag of rice for two bags of tea. & Kenya wishes to keep sso bags of rice after trade. Explain that the 2 countries can benefit by consuming more of both goods after trade.

Answer 1

Question 1

Using all its resources, SriLanka can produce 1,000 bags of rice or 3,000 bags of tea.

So, the opportunity cost of producing 1 bag of rice is (3,000/1,000) 3 bags of tea and the opportunity cost of producing 1 bag of tea is (1,000/3,000) 1/3 bags of rice.

Using all its resources, Kenya can produce 1,000 bags of rice or 1,000 bags of tea.

So, the opportunity cost of producing 1 bag of rice is (1,000/1,000) 1 bag of tea and the opportunity cost of producing 1 bag of tea is (1,000/1,000) 1 bag of rice.

It can be seen that SriLanka can produce tea at lower opportunity cost relative to Kenya.

On the other hand, Kenya can produce rice at lower opportunity cost relative to SriLanka.

So, SriLanka has comparative advantage in the production of tea and Kenya has the comparative advantage in the production of rice.

Now, both countries specialize in the production of good in which they have comparative advantage.

So, Srilanka will specialize in production of tea and will produce 3,000 bags of tea while Kenya will specialize in the production of rice and will produce 1,000 bags of rice.

After specialization, they will trade with each other with terms of trade of 1 bag of rice for 2 bags of tea.

Kenya wants to keep 550 bags of rice and thus will trade 450 bags of rice for 900 bags of tea.

So, after trade, Kenya will consume 550 bags of rice and 900 bags of tea while Srilanka will consume 450 bags of rice and 2,100 bags of tea.

Before specialization and trade, Kenya was consuming 500 bags of rice and 500 bags of tea while Srilanka was consuming 400 bags of rice and 1,800 bags of tea.

Thus, after trade, Kenya has been able to increase its consumption of rice by 50 bags and its consumption of tea by 400 bags. On the other hand, Srilanka has been able to increase its consumption of rice by 50 bags and its consumption of tea by 300 bags.

It can be seen that both countries have been able to increase their consumption after trade.

Thus, there is benefit in terms of increased total production and consumption if both countries trade with each other.