Question

Summary of opportunity cost theory of international trade

Answer 1

The opportunity cost of anything is meant the loss involved of some other commodity which could have been produced instead.

The opportunity cost theory of international trade tells us that if a country can produce either commodity Y or Z, the opportunity cost of commodity Y is the amount of the other commodity Z that must be given up in order to get one additional unit of commodity Y.

So, the exchange ratio between the two commodities is expressed in terms of their opportunity cost. The concept of opportunity costs has been shown in international trade theory with the help of production possibility curve (PPC)

The opportunity cost theory analyses pre-trade and post-trade situation under constant, increasing and decreasing opportunity costs Thus, the opportunity cost theory is superior to the classical comparative cost theory on analytical grounds.