ECO2011 Basic Microeconomics

Fall 2020
Emily Zheng
Comparative Advantage and Trades: Example 1
PPFs for picking apples and cherries

You and your neighbor each

have a limited time to pick
cherries and/or apples.

If you spend your time picking

cherries, you can pick 20
pounds of cherries.

Production Possibilities for You and If you spend you time picking
Your Neighbor, without Trade
apples, you can pick 20 pounds
of apples.
 PPFs for picking apples and cherries

If your neighbor spends all

of her time picking cherries,
she can pick 60 pounds of
cherries.

If your neighbor spends all

of her time picking apples,
she can pick 30 pounds of Production Possibilities for You and Your
apples. Neighbor, without Trade
Opportunity Costs of Picking Apples and Cherries

Opportunity Cost of Picking Opportunity Cost of Picking

1 Pound of Apples 1 Pound of Cherries
You 1 pound of cherries 1 pound of apples

Your Neighbor 2 pounds of cherries 0.5 pound of apples

Specialization and trade

What if you and your neighbor decided to specialize and trade?

Trade: The act of buying and selling.

Could your neighbor benefit from trade? She is better at picking

both apples and cherries…

Both of you can benefit from trade, by specializing in what you

are relatively good at. Let’s see how…
Gains from specialization and trade

When you don’t trade with your neighbor, you pick and consume
8 pounds of apples and 12 pounds of cherries per week—point A
in panel (a).
When your neighbor doesn’t trade with you, she picks and
consumes 9 pounds of apples and 42 pounds of cherries per
week—point C in panel (b).
Gains from specialization and trade

If you specialize in picking apples, you can pick 20 pounds. If

your neighbor specializes in picking cherries, she can pick 60
pounds.
If you trade 10 pounds of your apples for 15 pounds of your
neighbor’s cherries, you will be able to consume 10 pounds of
apples and 15 pounds of cherries— point B in panel (a).
Your neighbor can now consume 10 pounds of apples and 45
pounds of cherries—point D in panel (b). You and your neighbor
are both better off as a result of trade.
 A summary of the gains from trade

You Your Neighbor

Apples Cherries Apples Cherries

(in pounds) (in pounds) (in pounds) (in pounds)

Production and consumption

without trade 8 12 9 42

Production with trade 20 0 0 60

Consumption with trade 10 15 10 45

Gains from trade (increased

consumption) 2 3 1 3
Explaining the gains from specialization and trade

How could both of you benefit from trade, when your neighbor
was so much better than you?

Economists say your neighbor had an absolute advantage in

both cherry- and apple-picking, but you had a comparative
advantage in picking apples.
Comparative advantage and the gains from trade

Opportunity Costs of Picking Apples and Cherries

Opportunity Cost of Picking Opportunity Cost of Picking

1 Pound of Apples 1 Pound of Cherries
You 1 pound of cherries 1 pound of apples

Your Neighbor 2 pounds of cherries 0.5 pound of apples

The basis for trade is comparative advantage, not absolute

advantage.

Individuals, firms, and countries are better off if they specialize in

producing goods and services for which they have a comparative
advantage and obtain the other goods and services they need by
trading.
Comparative Advantage and Trades: Example 2
 (a) The Farmer’s s Production Possibilities Frontier

Meat (ounces)

If there is no trade,
the farmer chooses
8 this production and
consumption.

4 A

0 16 32 Potatoes (ounces)

Copyright©2003 Southwestern/Thomson Learning

Figure 1 The Production Possibilities Curve

(b) The Rancher’s Production Possibilities Frontier

Meat (ounces)

24

If there is no trade,
the rancher chooses
this production and
consumption.

12 B

0 24 48
Potatoes (ounces)

Copyright©2003 Southwestern/Thomson Learning

Summary

Copyright © 2004 South-Western

Specialization and Trade
• Can they be better off if they specialize in what they are relatively
good at?
Figure 2 How Trade Expands the Set of Consumption
Opportunities

(a) The Farmer’s Production and Consumption

Meat (ounces)

Farmer's
consumption
with trade
8 Farmer's
production and
consumption
5 A* without trade
4
A Farmer's
production
with trade

0 32 Potatoes (ounces)
16 17

Copyright©2003 Southwestern/Thomson Learning

Figure 2 How Trade Expands the Set of Consumption
Opportunities

(b) The Rancher’s Production and Consumption

Meat (ounces)

24 Rancher's
production
with trade
Rancher's
consumption
18 with trade

13
B* Rancher's
production and
B
12 consumption
without trade

0 12 24 27 48
Potatoes (ounces)

Copyright © 2004 South-Western

The Gains from Trade: A Summary

Copyright © 2004 South-Western

Making the Connection:
Comparative advantage and housework
• People living together have to divide up household chores.
• Basic economic concepts like comparative advantage can provide
useful insight in the division of labor.
• Suppose Jack is faster than Jill at both cooking and laundry. However:
• Jack is MUCH faster at preparing tasty meals, while
• Jack is only a little faster at doing laundry
• Jack’s comparative advantage is in cooking—to cook a tasty meal, he
gives up the opportunity to perform less laundry than Jill—so he
should specialize in this, while Jill specializes in laundry.

20
Who has a comparative advantage for
producing apples?

• You
• Your Neighbor
• You and your neighbor
• None of the above
If you have a comparative advantage in the
production of apples, what point would best
represent your production with trade?

• A
• A’
• C
• D
 a. Who has a comparative advantage in producing wine? Who has
comparative advantage in producing schnitzel?
b. Suppose that France is currently producing 1 bottle of wine and
6 lbs of schnitzel, and Germany is currently producing 3 bottles
of wine and 6 lbs of schnitzel. Demonstrate that France and
Germany can both be better off if they specialize in producing
only one good and then trade for the other.

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