Cotton vs. Wheat Production In Mexico
COTTON vs. WHEAT
Mr. LeMarcus Dillard was reviewing his files as he was flying to Mexico City from San Antonio, Texas. Given the short flight, he wished he had been able to read these files earlier and prepare a plan of action. Oh well! He better get to these soon.
LeMarcus had worked for an established produce brokering firm (Cotton Brokers of San Antonio, CBSA) headquartered in San Antonio. From among the various products it helped broker globally, cotton accounted for over 60% (50%) of its revenues (profits) in 2015. Wheat (20% revenues, 30% profits) and maize (20% revenues, 20% profits) rounded off its brokerage portfolio. The firm had always helped cotton-producing countries sell their cotton worldwide and receive stable prices for their products. They had helped Mexico export its quality cotton produce worldwide for over 10 years. It boasted an impressive list of cotton-producing countries as its clients – Egypt, Sudan, and many other countries in Asia, the Middle East, and North Africa. Nevertheless, Mexico remained its most important client in the cotton brokering segment of its business.
As he reviewed what the issues were, his anxiety level increased considerably. The Mexican government wanted to inform CBSA that they wanted to cancel the 5 years remaining on its contract with the firm. Their reasons shocked LeMarcus – the new government wanted to grow wheat instead of cotton so that it could eventually become self-sufficient in wheat. It reasoned that its population needed to be fed and they could not eat cotton! John did some rough calculations on his pad. The numbers he came up with did not justify Mexico’s stance. Mexico’s current cotton-producing efficiency was approximately 90% of that of Sudan and Egypt. However, it was only 50% as efficient as Canada in wheat production! Maybe manufacturing was an alternative to cotton or wheat? But this was no panacea – Mexico was producing manufacturing at approximately 75% efficiency relative to the most efficient global producer! He could not understand why Mexico was adopting this stance – producing cotton was shooting themselves in the foot, but switching to wheat was the equivalent of shooting themselves in the head! Wheat needs a cold climate to grow and Mexico is always hot and hotter! As he was pondering on what to do, he remembered reading somewhere that the new government had promised its population that it would become self-sufficient in food production – it was a matter of pride. He and his team had to work out a solution to this seemingly simple problem…. He still had time for one more Tequila……
Questions:
Prepare the correct ECONOMIC solution to this problem. What should Mexico grow from an economic perspective? Show all your calculations.
How should LeMarcus “sell” his solution to the Mexican importers?
Institutional affiliation
Comparative Advantage Economic Model In determining Cotton vs. Wheat Production In Mexico
Comparative advantage developed by David Ricardo and further clarified by James Mill provides the economical solution to the problem facing LeMarcus regarding explaining the proper production that Mexico needs to engage in (Landsburg, 2019). The comparative advantage concept depicts that a country will produce a good or service for a lesser opportunity cost than other countries. The opportunity cost measures the tradeoff. Therefore, the country with a comparative advantage makes the tradeoff worthwhile. The benefits that accrue from purchasing the good or service surpass the disadvantages. The country could not be the next in producing something, but if the goods have a lesser opportunity cost, other countries will import them.
To solve Mexico’s cotton vs. wheat dilemma, it is prudent that Mexico determines the product that gives it the most comparative advantage. For over a decade, the company has helped Mexico export its quality cotton to numerous countries globally. Its cotton-producing efficiency levels are at 90% compared to Egypt and Sudan. Conversely, its efficiency in wheat production is only 50% of Canada’s production levels. The calculation of comparative advantage will first require the calculation of the opportunity cost for each good from the different countries (Atar, 2021).
1. Mexico’s opportunity cost for producing 1 unit of cotton is 75% or 0.75 whole wheat production is at 50%.
Therefore 0.75 cotton units = 0.5 wheat units
To make it it into one cotton unit then both sides are divided by 0.75
(0.75/0.75) = 1 unit of cotton
(0.5/0.75) = 0.67 unit of wheat
Therefore, 1 unit of cotton = 0.67 unit of wheat
2. Mexico’s opportunity cost for producing 1 unit of wheat is at 50% or 0.5 while cotton production is at 75%.
Therefore, 0.50 wheat units = 0.75 units of cotton
To make it into one unit of wheat, then both sides are divided by 0.50
(0.50/0.50) = 1 unit of wheat
(0.75/0.50) = 1.5 units of cotton
Therefore, 1 unit of wheat = 1.5 units of cotton
3. Considering a country like Canada, it is stipulated that Mexico’s production of wheat is at 50% of what it produces. Therefore if its efficiency levels are at 80% then Mexico production is at 40%.
Therefore, production of 1 unit of wheat in Canada will be:
(0.80/0.80) = 1
(0.40/0.80) = 0.5 units
It is evident that Canada has the least opportunity cost for wheat compared to Mexico which means that Canada has a higher comparative advantage in the production of wheat. the two countries could engage in the trade of cotton and wheat. With Mexico having a comparative advantage in cotton production, it is prudent to engage in its production considering it can produce more at lower expenses. With Canada producing wheat, Mexico can trade with Canada on the product to ensure that it receives consistent quantities of wheat which will ensure that its population is fed. The promotion of comparative advantage is actually beneficial for Mexico and the countries it is trading with. This is because focussing on cotton production allows it to specialize and become even more efficient in producing quality. The smae happens in Canada’s wheat production processes, subsequently, Mexico will gain more benefits from producing cotton and purchasing wheat from its trade partners compared to the costs affiliated to stopping cotton production and starting to engage in wheat production.
Lemarcus needs to explain categorically to the Mexican government why producing products in which it has a comparative advantage would be much better compared to starting the production of wheat all over again (Britannica, 2021). The comparative advantage theory provides a robust argumenty that favors free trade and specialization in the involved countries.
References
Atar. (2021). Calculating comparative advantage | ATAR survival guide. Retrieved from https://www.atarsurvivalguide.com/calculating-comparative-advantage
Britannica, T. Editors of Encyclopedia (2021, December 22). comparative advantage. Encyclopedia Britannica. https://www.britannica.com/topic/comparative-advantage
Landsburg, L. F. (2019). Comparative advantage. Retrieved from https://www.econlib.org/library/Topics/Details/comparativeadvantage.html
