Question

If Ecuador has an absolute advantage in coffee production and Argentina in wheat, what should Ecuador focus on according to the theory of comparative advantage?

A) Produce both coffee and wheat
B) Focus on coffee production and trade for wheat
C) Focus on wheat production and trade for coffee
D) Produce neither coffee nor wheat

Answer 1

Ecuador should focus on coffee production and trade for wheat based on the theory of comparative advantage, as it benefits from specializing in goods where it has a relative efficiency over other countries.

Step-by-step explanation:

According to the theory of comparative advantage, Ecuador should focus on coffee production and trade for wheat. This theory posits that countries gain from specializing in the production of goods for which they have a comparative advantage and trading for goods produced by others. Even though Ecuador has an absolute advantage in coffee, and Argentina in wheat, each country can benefit from trade if they specialize in their respective goods where they are relatively more efficient, meaning they have a lower opportunity cost.