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Comparative Advantage in Trade Analysis

Vivian has a comparative advantage in making egg tarts and Veronica has a comparative advantage in making muffins. Joan will specialize in producing 25 jackets per day and Tanya will specialize in producing 20 pairs of shoes per day. If the world prices are $2 per square yard of shelter and $3 per pound of food, Ann and Ben will produce 6 square yards of shelter and 10 pounds of food per week.

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13 views4 pages

Comparative Advantage in Trade Analysis

Vivian has a comparative advantage in making egg tarts and Veronica has a comparative advantage in making muffins. Joan will specialize in producing 25 jackets per day and Tanya will specialize in producing 20 pairs of shoes per day. If the world prices are $2 per square yard of shelter and $3 per pound of food, Ann and Ben will produce 6 square yards of shelter and 10 pounds of food per week.

Uploaded by

Chris Wong
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Please preview the notes and bring your questions to my tutorial!

ECON1210 Tutorial 2
Xiaokang SHENG
Email: csxk@[Link] Office: KK1026

Sep 17, 2020

Ch 2. Power of Trade and Comparative Advantage

1. Comparative Advantage

1.1 Given time


Time required by each to complete each type of job:
Painting Roofing
Paul 300 hrs 400 hrs
Ron 200 hrs 100 hrs

Remember: The smaller, the better!


OC Painting OC Roofing
Paul 300/400 = 400/300 =
0.75 roofing 1.33 painting
Ron 200/100 = 100/200 =
2 roofing 0.5 painting

Comparative Advantage:
An agent who has lower opportunity cost of producing that good.
Paul has a comparative advantage over Ron at painting, which means that he is
relatively more efficient at painting than Ron is.

Q1. The following tables shows the number of hours needed for Vivian and Veronica
to bake a dozen of egg tarts or a dozen of muffins.

We can conclude that ________ has/have comparative advantage in making egg tarts
and _________ has/have comparative advantage in making muffins.
Page 1 of 4
1.2 Given quantity
Units produced per day:
Sandwiches Hamburgers
Chris 25 60
Jenny 10 50

Remember: The larger, the better!

OC Sandwiches OC Hamburgers
Chris 60/25 = 2.4 H 25/60 = 0.42 S
Jenny 50/10 = 5 H 10/50 = 0.2 S

• Chris will specialize in producing sandwich and Jenny will specialize in producing
hamburger;
• Chris and Jenny will only agree to trade when the ToT is mutually beneficial. So,
the range of ToT lies between 2.4 and 5 units of hamburgers per sandwich.

(What if the ToT is larger than 5 or smaller than 2.4?)

Q2. Suppose that Joan and Tanya both produce jacket and shoes. In a day, Joan can
produce either 25 jackets or 10 pairs of shoes. In a day, Tanya can produce either 60
jackets or 20 pairs shoes. Assume that Joan and Tanya decide to COMPLETELY
specialize in the production of one type of goods and trade with one another. In a day,
Joan will produce __________ jackets and ___________ pairs of shoes, while Tanya
will produce ________ jackets and _________ pairs of shoes.

Q3. Ann can produce 10 square yards of shelter or 10 pounds of food per week. Ben
can produce 6 square yards of shelter or 3 pounds of food per week. Suppose the two-
person economy that consists of Ann and Ben can now trade in the world market, where
the price per square yard of shelter is $2 and the price per pound of food is $3. Then
they will produce _____ square yards of shelter and _____ pounds of food per week.

Page 2 of 4
2. PPC & CPC

PPC: Flatter, lower O.C. of producing X; steeper, higher O.C. of producing X (lower
O.C. of producing Y).

• Closed-economy: PPC=CPC;
• Open-economy: We can BENEFIT from it!

Suppose A(x0, y0), we have pxx0+pyy0=I.


Actually, any consumption bundle (x, y) must satisfy pxx+pyy=I.
𝐼 𝑝𝑥
Rearrange, we get 𝑦= − 𝑥.
𝑝𝑦 𝑝𝑦

Q4a. The following graph shows the Neverland’s production possibilities. Neverland
is a small nation. Suppose the world price of Tea is $2 per kg and the world price of
Banana is $1 per kg, and Neverland decides to open up to the world market and trade.
How many kgs of banana could they consume if they were to consume 10 kgs of tea?

Page 3 of 4
Q4b. Suppose the world price of Tea is $1 per kg and the world price of Banana is $2
per kg. How many kgs of banana could they consume if they were to consume 10 kgs
of tea?

Q4c. Suppose the world price of Tea is $4 per kg and the world price of Banana is $1
per kg. How many kgs of banana could they consume if they were to consume 10 kgs
of tea?

Q5. Is the kink point always optimal?

Hint:
In a two-person economy, slopes of their PPCs are -a and -b respectively (0<a<b):
px
①0< < a, __________;
py
px
②a< < b, __________;
py
px
③ > b, __________.
py

--END--

Page 4 of 4

Common questions

Powered by AI

The mutually beneficial range for the terms of trade (ToT) lies between 2.4 and 5 hamburgers per sandwich. Chris's opportunity cost is 2.4 hamburgers per sandwich, whereas Jenny's is 5 hamburgers per sandwich. Therefore, for trade to be beneficial, the ToT should be between these values .

Paul's opportunity cost for painting is 0.75 units of roofing per painting, and for roofing, it is 1.33 paintings per roofing. Ron's opportunity cost for painting is 2 units of roofing per painting, and for roofing, it is 0.5 paintings per roofing . Comparative advantage is determined by the lower opportunity cost, which means Paul has a comparative advantage in painting and Ron has a comparative advantage in roofing

In an open economy, the consumption possibilities curve (CPC) can extend beyond the production possibilities curve (PPC), allowing for greater consumption than would be possible with domestic production alone due to trade. The CPC reflects possible consumption bundles that the economy can achieve by trading with the world market .

At different world prices, the amount of bananas Neverland can consume by trading 10 kg of tea varies. If the price of tea is $2/kg and bananas are $1/kg, 20 kg of bananas can be consumed. If tea is $1/kg and bananas $2/kg, only 5 kg of bananas can be consumed. If tea is $4/kg and bananas $1/kg, 40 kg of bananas can be consumed .

The kink point on their PPC is considered optimal if the market price ratio px/py falls between the individual opportunity costs (a < px/py < b). Outside this range, specialization according to comparative advantage leads to higher production possibilities, as individuals will trade at ratios that reflect these advantages .

Joan has a comparative advantage in producing jackets with an opportunity cost of 0.4 pairs of shoes per jacket, which is less than Tanya’s 0.33 pairs of shoes per jacket. Tanya has a comparative advantage in producing shoes. Thus, Joan will produce 25 jackets, and Tanya will produce 20 pairs of shoes .

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