 |  Principles of Microeconomics, 1st Canadian Edition Robert H. Frank,
Cornell University
Ben S. Bernanke,
Princeton University
Lars Osberg,
Dalhousie University
Melvin Cross,
Dalhousie University
Brian MacLean,
Laurentian University
Comparative Advantage: The Basis for Exchange
Graphing ExercisesExtending the Text Examples 3.5 through 3.8 highlight the fact that individuals (and countries) can jointly benefit from specializing in the production of goods and services in which they have a comparative advantage. In those examples, Tom and Susan (the individuals in this simple two-person economy) produce sugar cane and nuts. The graph pop-up describes Tom and Susan's current productivity (per hour) of these two goods (note that numbers are different than those used in the textbook), while the graphs illustrate their associated individual and combined production possibility frontiers, assuming that each individual works a maximum of 8 hours per day and splits his/her time equally between sugar cane and nut production. |
| | 1. | According to the information in the graph pop-up, what is the opportunity cost of sugar cane for Tom and Susan? What is the opportunity cost of nuts for Tom and Susan? How are these calculated?
See our suggested answer. |
| | 2. | Who has a comparative advantage in sugar cane production? Who has a comparative advantage in nut production? Which good should each person specialize in to boost overall production in the economy?
See our suggested answer. |
| | 3. | Initially, each person spends half the day harvesting sugar cane and half the day picking nuts. What happens to total production of sugar cane and nuts in this economy if each person spends the entire day producing the good that he/she has a comparative advantage in? To see the effects of this reallocation of labour hours, change the Sugar cane Labour Hours values for Tom and Susan in the table above (the Nuts Labour Hours value will change automatically) and see what happens to New Production. What happens to overall production in this economy? What do you conclude about the benefits of specialization?
See our suggested answer. |
| On Your Own: What Happens When Productivity Changes?
How do changes in productivity affect overall production and the gains from specialization in an economy?
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| | 4. | Reset the tables and graphs to their original values by clicking on the Reset button. Now let's assume that Susan and Tom get trained in new picking techniques that allow them to dramatically increase their overall picking productivity for both goods. To illustrate this, increase each of the productivity numbers in the table by 25% (i.e. Tom's sugar cane production rises to 25 kilograms per hour and his nut production to 40 kilograms per hour, while Susan's sugar cane production rises to 40 kilograms per hour and her nut production to 25 kilograms per hour). What happens to the individual production possibility curves (PPCs) and the combined PPC?
See our suggested answer. |
| | 5. | After the increase in economy-wide productivity, who has a comparative advantage in sugar cane production? Who has a comparative advantage in nut production? Which good should each person specialize in? What happens to overall production in the economy after specialization?
See our suggested answer. |
| | 6. | Reset the tables and graphs to their original values by clicking on the Reset button. Now let's assume that Susan develops a tool that that allows her to harvest 25% more kilograms of sugar cane in an hour than previously. Tom does not have access to this tool. To illustrate this, increase Susan's productivity number for sugar cane by 25% (to 40 kilograms per hour from the original 32 kilograms per hour). What happens to the individual production possibility curves (PPCs) and the combined PPC? Who has a comparative advantage in sugar cane production? Who has a comparative advantage in nut production? Which good should each person specialize in? What happens to total production of sugar cane and nuts in this economy if each person spends the entire day producing the good that he/she has a comparative advantage in?
See our suggested answer. |
| | 7. | Based on your analysis, how do changes in productivity that affect only one producer differ from those that affect all producers similarly? Can you relate this to the world economy?
See our suggested answer. |
| Questions to Think About... Starting from the initial productivity figures (use the Reset button to reset the values in the graph pop-up), if Tom and Susan have the ability to trade with another country whose opportunity cost of a kilogram of sugar cane is 2.0 kilograms of nuts, how will Tom and Susan allocate their labour hours between sugar cane and nut production? If the "world" opportunity cost of a kilogram of sugar cane falls to 1 kilogram of nuts, how will Tom and Susan's allocation of labour hours devoted to sugar cane and nut production change? |
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2003 McGraw-Hill Higher Education