Specialization, Trade-offs and Comparative Advantage in Kenya and Sri Lanka Trade. Here are some hypothetical numbers used to illustrate the ideas of trade-offs, specialization, and comparative advantage. Assume that using all its resources efficiently, Sri Lanka can produce either 1,000 bags of rice OR 3,000 bags of tea. Let’s also assume that, using all her […]
Today, international trade, either bilateral or multilateral, has become widespread. The trade-off is founded on both specialization and comparative advantage. In this case, comparative advantage, which is the capacity of a country to produce a specific good or service at a relatively lower opportunity cost, leads to specialization (Amadeo). Resource endowments are the foundation of trade-offs, specialization, and comparative advantage, which explains why a bilateral trade between Kenya and Sri Lanka can be essential.
Assuming that the countries have similar resource endowments, they can engage in trade since their consumption differs. The following table offers a quick snapshot of the resource endowments and consumption.
1 bag of rice= 2 bags of tea; Kenya must retain 550 bags of rice after the trade.
Considering the volume of production, it is apparent that both countries can produce rice, but concerning tea, Sri Lanka has a higher capacity. From what it makes, Sri Lanka consumes, and it is left with a balance of 600 bags of rice and 1200 bags of tea. Kenya, in contrast, is left with 500 bags of rice and 500 bags of tea. After the trade, Kenya must retain 550 bags of rice. Note the Balance after local consumption is what is available for trade. Given that 1 bag of rice is equivalent to 2 bags of tea, it is manifest that Sri Lanka still has a comparative advantage in selling tea that is left after domestic consumption.
Kenya cannot sell rice since the Balance left is less than what it wishes to retain. It, thus, has to buy rice from Sri Lanka. On the other hand, Sri Lanka has an excess of 1200 bags of tea (equivalent to 600 bags of rice) that are unconsumed. It can also sell them to Kenya, a country with relatively low tea consumption. This trade-off means that in producing rice and tea, Sri Lanka is in a better position due to low opportunity costs; this could be due to embracing technology in production. The trade could boost the demand of Kenya’s economy.
Amadeo, Kimberly. “Understanding Comparative Advantage.” The Balance, 11 Oct. 2006, www.thebalance.com/comparative-advantage-3305915. Accessed 6 Feb. 2019.
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Published On: 07-02-2019