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Opportunity costs are there in all sectors of the economy. The opportunities do exist both in local and international trade. The international trade involves opportunity cost. Economists view it as example of having alternative choices to make regarding resource allocation. International trade is the exchange of commodities and services between countries. The trade helps to promote the world economy. The supply, demand, and prices of the goods and services are in turn affected by global actions.
Economists use the international trade graphs to study the opportunity costs and benefits. These require fundamental concepts in economics. The opportunity cost is a principle based on benefits. This means an opportunity should be utilized in line with the benefit it is going to bring that matches the cost of production. These require the understanding of the fundamentals of the cost of products. The international trade gives countries and consumers the opportunity cost. This is because they can get the goods and services that are not in their country. Many or nearly all products are found on the international market. These can be in form goods such as; clothes, jewelry, stocks, food, oil, spare parts, water, and currencies. On the other hand, services include; banking, tourism, transportation, and consulting. Exports are products sold to the global market, while, imports, products brought from global market. Both the exports and imports are accounted for individual countries’ current accounts.
The cost of opportunity is considered on the implicit value. The explicit cost of the opportunity comes in handy at the same time. Opportunity costs to economists are a core concept in economics. The problem is most economists do not understand the concept of opportunity cost in the first place. Research done has proved that most economists do not know the difference of opportunity cost and accounting cost. The value of the opportunity cost is what should be looked at in all instances. Weighing the opportunity cost and the benefits it provides should be the principle behind economics. The significant goal in opportunity cost is the benefits it provides.
People do make choices on what services and goods they want to consume and buy. These choices are what determine how the resources available will be utilized. The same choices have repercussions on the economy. These can be either in terms of present or future costs. Economists have a famous say that “there is nothing like free lunch”. This implies that even when one has not paid for a good or service, there was scarce resource that was used in the production. Thus, an opportunity cost was involved. This means there was also an alternative of producing the same resources. Any opportunity cost is used to measre an economy choice on the best alternative that was taken. Examples of opportunity cost exist in all level of life. These can include; a firm, government, household, individual, and economy of a nation. This in return translates that there is loss of resources or wages when any opportunity cost is not worked upon. Any activity that involves spending money is an opportunity cost. For example when one decides to travel to a foreign country as a tourist, there is a lost opportunity to enjoy another activity in his own country.
Another significant aspect of opportunity cost is that it is not always about a number. This means that an opportunity cost of an activity is an alternative of another that was to be done. A person can have so many activities to undertake. But, deciding to choose one at the expense of another is an opportunity cost. It implies that opportunity cost is the choice of the best alternative to the action performed. However, this does not include or mean a set of various alternatives. The benefits of one action are an alternative of another. This is what cost of opportunity entails in general. This benefit of another action must be forgone to enjoy the best alternative. A definite choice has to be made between two options. Things can be simple and easy if one was in a position to know an outcome of a decision. This however, is not always the case and a risk has to be taken to get or achieve the results which are the benefits. This can be in the form of monetary value and hence an opportunity cost.
Economics deals with scarcity of resources as one of the basic concepts. This scarcity of resources leads to trade-offs. The tradeoffs are what in the end results to opportunity cost. Most of the goods and services are valued in terms of monetary value. However, this is not the case when dealing with opportunity cost, as it deals with decisions. This decision involves giving up of alternatives of actions. Thus, the decision that involves alternatives and options is an opportunity cost. The opportunity cost is in contrast to the accounting cost. This is so because in accounting costs, forgone opportunities are not considered. Thus, opportunity cost comes in handy when one is evaluating the benefits and cost of the choices. This benefit comes in monetary terms in most situations. The expression of the cost of one option over the other forgone benefits helps in comparing the marginal benefits and marginal costs. Moreover, the opportunity cost can be expressed in terms of relative price. This is the price of one choice in relation to the price of the other. In addition, the relative price gives a better perspective on the real cost of goods and services compared to what monetary price gives. The opportunity cost can be applied in many aspects of life. These include; time management, production possibilities, consumer choice, cost of capital, scrutiny of proportional improvement, and careeer choice. The opportunity costs are used computing an analysis on the benefits of an action. These benefits are however not recorded in accounting books, but they are recognized in decision making aspects of computing the outcomes. The value, profit and benefit of an action is what should determine a choice of action, and this is what is significant in economics
International trade helps to promote and understand the concept of cost of opportunity. International trade gives a nation an opportunity to expand her market. The expansion involves both goods and services. The exchange helps a nation to get what it cannot produce, and at the same time, it can sell what others do not have. The global trade has allowed wealthy countries to utilize their resources. The labor, capital, and technology have become more efficient. Different countries are endowed with diverse natural resources and assets that make them to be efficient. This makes countries that produce more efficient goods and services trade with others that are capable. This leads to specialization at the international trade level. The opportunity cost of countries to produce products, is better than the cost of specialization.
The opportunity cost of most countries in producing products is much cheaper. Therefore, the specialization reduces the opportunity cost. This in effect maximizes the efficiency of a country to get the products they require. The high supply makes the price of products to reduce and these streams down to the consumer. The economy of a country thus, becomes efficient in producing goods and services. The international trade therefore is significant as it helps a country to determine how it allocates the resources in regard to the opportunity cost. When a country decides to produce a produce the opportunity cost is equivalent to giving up the production. However, opportunity cost is different with each nature, thus the valuation of a product in a country varies with the allocation of resources. Trade is necessitated by the difference in resources between countries. This gives an opportunity cost in production of gods and services that might have been produced. Producing products with lower opportunity cost is more efficient with the use of increased production compared to those with higher opportunity cost. This brings comparative advantage to nations with lower opportunity cost.
Countries have different opportunity costs because of the various productive resources that they have. The international trade is not static, and this leads to scare resources hence higher living standards. This is brought by increase in the significance and amount of trade. Moreover, newer supplies of resources, improved better programs of education, and better capital resources for manpower.