Question 5 Flashcards
Thinking about Bob and Mary what is comparative advantage?
A person or nation has a comparative advantage if they can perform an activity at a lower opportunity cost than others and both persons countries will gain from trade if both of them specialize in producing on the basis of comparative advantage.
Identify comparative advantage of Bob and Mary.
Bob can type 6 pages or 2 cakes Mary can type 12 pages or 4 cakes 2/6 = 1/3 = 0.33 4/12 = 1/3 = 0.33 Both Bob and Mary have exactly the same opportunity cost (assuming a linear PPF) *opportunity cost to produce one unit of page is 3 units of cake. *opportunity cost to produce one unit of cake is 3 pages
In this example, do you think that a comparative advantage leads to complete specialization?
No there will be no specialization as both parties have the same opportunity costs. No incentive to specialize. for an increase in 1 unit of cake, each party would need to drop the 3 units of page. *PPF gradient for both is equal.
Demonstrate with graph
x
will there be any trade between Bob and Mary?
No in this situation trade will not bring any benefit to either party
