The Gains from Trade

Why do people specialize in the production of

a few goods or services and then trade?

Why don't people become self-sufficient

instead, producing everything they need?

Comparative slide 1
 An Example
Suppose there are two people, McPherson and
Brown.

Both can produce Tacos and Spaghetti, but

they are not equally adept.

Comparative slide 2
 McPherson's Daily Production
Possibilities
tacos

10 spaghetti

Comparative slide 3
McPherson has preferences that make him
want to consume 4 tacos and 2 spaghetti.

[Show his consumption point on the graph.]

Comparative slide 4
 McPherson's Daily Production
Possibilities
tacos

He consumes 4 tacos
and 2 spaghetti
5

10 spaghetti

Comparative slide 5
 Brown's Daily Production
Possibilities
tacos
12
Brown

5
McPherson

10 12 spaghetti

Comparative slide 6
Suppose that Brown consumes 5 spaghetti and
7 tacos.

[Show his consumption point on the graph.]

Comparative slide 7
 Brown's Daily Production
Possibilities
tacos
12

Brown consumes 7
tacos and 5 spaghetti
5

10 12 spaghetti

Comparative slide 8
Without specialization and trade here's where
they are in production and consumption:

S T
Brown 5 7
McPherson 2 4

Total 7 11

Comparative slide 9
Absolute advantage: A person has an absolute
advantage in the production of a good if
he/she uses less inputs to produce a unit of
the good.

Notice that Brown has an "absolute

advantage" in the production of both goods.

Comparative slide 10
Comparative advantage: A person has a
comparative advantage in the production of
a good if that person can produce an extra
unit of the good at lower opportunity cost.

Comparative slide 11
Be sure you can answer these questions:

1) What's McPherson's cost of one more plate

of spaghetti?
2) What's Brown's cost of one more plate of
spaghetti?
3) Who has the "comparative advantage" in
spaghetti production?

Go to hidden slide

Comparative slide 12
Now let McPherson specialize completely in
the production of spaghetti, and Brown
specialize completely in the production of
tacos.

Comparative slide 14
The table at the right shows total production
with specialization. More is produced of
both goods.
No specialization Specialization
S T S T
Brown 5 7 Brown 0 12
McPherson 2 4 McPherson 10 0

Total 7 11 Total 10 12

Comparative slide 15
If Brown and McPherson can arrange to
specialize and then trade, both can be better
off. There’s more of both goods!
In this case the gains from specialization are 3
plates of spaghetti and 1 taco.

Comparative slide 16