Question

Assume: 1) only two commodities are produced; 2) there are constant ratios of input to output whatever the level of output of coffee and bananas; and 3) competition prevails in all markets.

	Labor hours per keg of coffee	Labor hours per kilogram of bananas
Peruvia	12	15
Zululand	6	5

1. Which nation has a comparative advantage in banana production?

   Assume: 1) only two commodities are produced; 2) there are constant ratios of input to output whatever the level of output of coffee and bananas; and 3) competition prevails in all markets.

   	Labor hours per keg of coffee	Labor hours per kilogram of bananas
   Peruvia	12	15
   Zululand	6	5

2. Which nation has a comparative advantage in banana production?

Answer 1

A country is said to have a comparative advantage if it produces a good or service with the lowest opportunity cost. To calculate comparative advantage, you have to calculate the opportunity cost of each good or service.

Step 1: Calculate the Opportunity Cost of Each Good from Each Country.

• We need to calculate the opportunity cost of 1 kg of coffee from each country.
• Peruvia's opportunity cost of 1 kg of coffee.
• Peruvia can produce 12 kg coffee or 15 kg bananas
• Therefore; 12 kg coffee = 15 kg bananas
• We need to make it 1 kg coffee, so we divide both sides by 12
• 12 kg coffee/ 12 = 1 kg coffee
• 15 kg bananas /12 = 1.25 kg bananas
• Hence, 1 kg coffee = 1.25 kg bananas
• Zululand's opportunity cost of 1 kg of coffee.
• Zululand's can produce 6 kg coffee or 5 kg bananas
• Therefore, 6 kg coffee = 5 kg bananas
• We need to make it 1 kg coffee, so we divide both sides by 6
• 6 kg coffee/ 6 = 1 kg coffee
• 5 kg bananas /6 = .083 kg bananas
• Hence, 1 kg coffee = 0.83 kg banana
• Now calculate the opportunity cost of 1 kg banana from each country just as before.
• Peruvia's opportunity cost of 1 kg of banana
• Peruvia can produce 15 kg of banana or 12kg of coffee
• Therefore, 15 kg of banana = 12kg of coffee
• We need to make it 1 kg of banana, so we divide both sides by 15
• 15 kg of banana/ 15 = 1 kg of banana
• 12 kg of coffee /15 = 0.8 kg of coffee
• Hence, 1kg of banana = 0.8 kg of coffee
• Zululand's opportunity cost of 1 kg of banana
• Zululand's can produce 5 kg of banana or 6 kg of coffee
• Therefore,5 kg bananas = 6 kg of coffee
• We need to make it 1 kg banana, so we divide both sides by 5  
• 5 kg of banana/ 5 = 1 kg of banana
• 6 kg of coffee /5 = 1.2 kg of coffee
• Hence, 1kg of banana = 1.2 kg of coffee

Step 2: Plot the opportunity costs on the Two Way Table

	coffee	banana
Peruvia	12 (1 kg coffee = 1.25 kg bananas)	15 (1kg of banana = 0.8 kg of coffee)
Zululand	6 ( 1 kg coffee = 0.83 kg banana)	5 (1kg of banana = 1.2 kg of coffee)

Step 3: Identify the Comparative Advantage

Comparative advantage is when a country can produce a good with the least opportunity cost. In this example, the opportunity for coffee is 1.25 bananas in Pervia and 0.83 bananas in Zululand. As Zululand has the lowest opportunity cost for coffee, therefore it has a comparative advantage in the production of coffee If done correctly, Peruvia must have a comparative advantage in bananas, as it is impossible for a single country to have a comparative advantage in both goods.For bananas, the opportunity cost for 1 kg of banana is 0.8 kg of coffee in Peruvia and 1.2 kg of coffee in Zululand. Therefore, Peruvia has a comparative advantage in the production of bananas.