Comparative Advantage- Consuming Beyond the PPC

Question 1

What does it mean to “consume beyond the PPC”?

Answer 1

It means a country (or person) is able to consume more of both goods than they could produce alone, which is only possible through specialisation and trade.

Question 2

ack and Jill – Production Possibilities

Person Forks Knives
Jack 10 30
Jill 30 10

Answer 2

Each person can only produce one combination at a time — they have linear PPCs.

Question 3

Opportunity Cost – Jack

Answer 3

1 fork = 3 knives (30 knives ÷ 10 forks)

1 knife = 1/3 fork

Question 4

Opportunity Cost – Jill

Answer 4

1 fork = 1/3 knife (10 knives ÷ 30 forks)

1 knife = 3 forks

Question 5

Who has the comparative advantage in what?

Answer 5

Jack has a lower opportunity cost in knives (1 knife = 1/3 fork vs Jill’s 3 forks)

Jill has a lower opportunity cost in forks (1 fork = 1/3 knife vs Jack’s 3 knives)

➡️ So:

Jack should specialise in knives

Jill should specialise in forks

Question 6

Suppose the terms of trade are 1 fork = 1 knife. What happens?

Answer 6

If Jack trades 15 knives to Jill in exchange for 15 forks, both benefit:

Jack ends with: 15 forks (from trade), 15 knives (leftover after trade)

Jill ends with: 15 knives (from trade), 15 forks (leftover after trade)

Result: Both consume 15 forks and 15 knives – a bundle neither could produce alone!

Question 7

Why is this bundle (15,15) outside their individual PPCs?

Answer 7

Jack can only produce a max of 30 knives or 10 forks

Jill can only produce a max of 30 forks or 10 knives

The (15,15) bundle lies outside both PPCs – meaning trade enabled a gain in total consumption

Question 8

How does trade based on comparative advantage allow consumption beyond the PPC?

Answer 8

When two parties specialise in goods where they have a comparative advantage and trade at a suitable rate, they can consume combinations of goods that lie beyond their individual PPCs — increasing their overall welfare.