England as a relatively cool and cloudy climate that is ill-suited for grape growing. It can produce 200 units of wine for every 400 units of cloth. Portugal in contrast has a relatively warm and sunny climate that is good for growing grapes. It can produce 200 units of wine for every 100 units of cloth. Which country has the higher opportunity cost of producing cloth?
The opportunity cost is what is given up when a decision is made. The law of comparative advantage states that in trade between two countries, the one with the lowest opportunity cost for making a good (say product A), should specialize in producing A and trade it to the other country.
Answer and Explanation:
The opportunity cost for making a cloth for England is 200 wine units / 400 units of cloth which equals .5. England gives up .5 units of wine for...
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fromChapter 1 / Lesson 3
Learn the formula that reveals the economic value in any major choice between two possibilities. Every choice involves tradeoffs, and opportunity cost shows you how to measure these tradeoffs.