IGCSE Economics 0455: The Basic Economic Problem and Opportunity Cost for a Whole Economy

The country of Meridia has a fixed, limited number of farm workers and a fixed area of farmland. Meridia's government decides that a larger share of this workforce and farmland should now be used to grow cotton for export, rather than to grow the wheat and vegetables that feed Meridia's own population directly.

(a) Explain why the basic economic problem applies to a whole economy such as Meridia, and not only to individual consumers or firms. [2]

(b) State which of the three basic economic questions is illustrated by Meridia's decision to grow more cotton for export rather than more wheat and vegetables for its own population. [1]

(c) Explain the opportunity cost of Meridia's decision, and explain why measuring this opportunity cost only in terms of money, such as the export revenue cotton earns, would not be a fully correct answer. [5]

Part (a): The basic economic problem at the level of a whole economy

Meridia’s farm workers and farmland are limited in total supply, just as an individual’s income or a single firm’s premises are limited. At the same time, Meridia’s population wants several things from these resources at once: enough food to feed itself, income from exports, and other goods and services, and these wants, taken together, exceed what the available workers and farmland can produce simultaneously.

Because finite national resources cannot satisfy every want the population has for them, Meridia faces the same basic economic problem as an individual consumer or a single firm; only the scale is different, moving from one person’s or one firm’s resources to an entire country’s.

Part (b): Identifying the basic economic question

Meridia’s government is not changing who receives the output, nor how cotton or food is physically grown; it is deciding which good its workers and farmland should be used to produce, cotton for export or wheat and vegetables for domestic consumption. This is a direct example of the what to produce question.

Part (c): The real opportunity cost, not just a sum of money

Once more of Meridia’s workers and farmland are devoted to cotton, that same labour and land are no longer available to grow wheat and vegetables. The opportunity cost of the government’s decision is therefore this forgone food output: the extra wheat and vegetables, and the food self-sufficiency they would have provided, that Meridia’s population will not now have.

It might seem simplest to express this opportunity cost as a sum of money, for instance, the revenue Meridia earns from exporting the cotton. This would not be a fully correct answer, because that export revenue is the benefit of the choice actually made, not what is given up; stating it does not tell us what the population has sacrificed. The genuine opportunity cost can only be identified by naming the specific real alternative, the wheat and vegetables (and the food security they represent), that the same workers and farmland would otherwise have produced.

Final answers

(a) Meridia’s workers and farmland are finite relative to its population’s wants, so the basic economic problem applies to the whole economy just as it does to individuals and firms.
(b) The decision illustrates what to produce.
(c) The opportunity cost is the wheat and vegetables Meridia’s population gives up; stating it only as export revenue is incomplete because that revenue is the benefit gained, not the real alternative sacrificed.