Question

The Dominican Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 25 thousand tons of coffee per year or 5 thousand barrels of rum. Nicaragua can produce 18 thousand tons of coffee per year or 3 thousand barrels of rum. Suppose the Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in the production of either coffee or rum.

RequireDd
a. Which country should specialize in coffee?
b. Which country should specialize in rum?

Answer 1

a. Nicaragua

b, Dominican Republic

Step-by-step explanation:

A country should specialise in the production of goods for which it has a comparative advantage in its production

A country has comparative advantage in production if it produces at a lower opportunity cost when compared with other countries.

The Dominican Republic

opportunity cost of producing rum = 25,000 / 5000 = 5

opportunity cost of producing coffee = 5000 / 25000 = 0.2

Nicaragua

opportunity cost of producing rum = 6

opportunity cost of producing coffee = 0.17

The Dominican Republic has a lower opportunity cost in the production of rum. It should specialise in the production of rum

Nicaragua has a lower opportunity cost in the production of coffee. It should specialise in the production of coffee