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ModULE 1.3
the production possibilities curve in Figure 1.2-1. According to this PPC, Alexis could
catch 40 fish, but only if she gathered no coconuts, and she could gather 30 coconuts,
but only if she caught no fish. Recall that this means the slope of her production pos-
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sibilities curve is − ⁄4: her opportunity cost of 1 fish is ⁄4 of a coconut.
Panel (b) of Figure 1.3-1 shows Jacob’s production possibilities. Like that of Alexis,
Jacob’s production possibilities curve is a straight line, implying a constant opportu-
nity cost of fish in terms of coconuts. His production possibilities curve has a constant
slope of −2. Jacob is less productive all around: at most he can produce 10 fish or 20
coconuts. But he is particularly bad at fishing: whereas Alexis sacrifices ⁄4 of a coconut
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per fish caught, for Jacob, the opportunity cost of a fish is 2 whole coconuts. Table 1.3-1
summarizes the two castaways’ opportunity costs of fish and coconuts.

Table 1.3-1 Alexis’s and Jacob’s opportunity Costs of Fish and Coconuts

Alexis’s Opportunity Cost Jacob’s Opportunity Cost
One fish 3 /4 coconut 2 coconuts
One coconut 4 /3 fish 1 /2 fish

With information on opportunity costs we can determine who has the comparative An individual has a comparative
advantage in producing each good. An individual has a comparative advantage in advantage in producing a
producing something if they have the lowest opportunity cost among the producers. good or service if that person’s
In other words, Jacob has a comparative advantage over Alexis in producing a partic- opportunity cost is the lowest
ular good or service if Jacob’s opportunity cost of producing that good or service is among the people who could
lower than Alexis’s opportunity cost. In this case, Jacob has a comparative advantage produce that good or service.
in gathering coconuts because his opportunity cost of ⁄2 fish is lower than Alexis’s
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4
opportunity cost of ⁄3 fish, and Alexis has a comparative advantage in catching fish An individual has an absolute
because her opportunity cost of ⁄4 coconut is lower than Jacob’s opportunity cost of 2 advantage in producing a good
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or service if they can make more
coconuts. of it with a given amount of time
Notice that Alexis is better than Jacob at producing both goods: If both castaways and resources.
devoted their efforts to catching fish, Alexis would catch 40 fish per week while Jacob
caught 10, and if they devoted their efforts to gathering coconuts, Alexis would gather AP ECoN TIP
®
30 coconuts per week while Jacob gathered 20. Information on possible output levels
allows us to determine absolute advantages. An individual has an absolute advantage Having an absolute
in producing something if that person can produce more of it with a given amount of advantage is not the
time and resources. Since Alexis can make more of either good than Jacob, Alexis has same thing as having a
an absolute advantage in both activities. comparative advantage. For
To examine the gains from trade, our point of comparison will be the alternative example, it is quite possible
to trade: Alexis and Jacob could go their separate ways, each living on their own side to be able to make more
of the island, catching their own fish and gathering their own coconuts. Let’s suppose of something than other
they start out that way and make the consumption choices shown in Figure 1.3-2: in producers (that is, to have
the absence of trade, Alexis consumes 28 fish and 9 coconuts per week, while Jacob an absolute advantage)
consumes 6 fish and 8 coconuts. but to have a higher
Is this the best they can do? No, it isn’t. Given that the two castaways have dif- opportunity cost than other
ferent opportunity costs, each has a comparative advantage in one good or the other. producers (that is, to have a
They can specialize on the basis of their comparative advantages and strike a trade comparative disadvantage).
deal that makes both of them better off. Table 1.3-2 shows how such a deal can work:
Alexis specializes in the production of fish, catching 40 per week, and gives 10 to Jacob.
Meanwhile, Jacob specializes in the production of coconuts, gathering 20 per week,
and gives 10 to Alexis. The result is shown by the points above the PPCs in Figure
1.3-2. Alexis now consumes more of both goods than before: instead of 28 fish and
9 coconuts, she consumes 30 fish and 10 coconuts. Jacob also consumes more, going
from 6 fish and 8 coconuts to 10 fish and 10 coconuts. As Table 1.3-2 also shows, both
Alexis and Jacob experience gains from trade: Alexis’s consumption of fish increases by
two, and her consumption of coconuts increases by one. Jacob’s consumption of fish
increases by four, and his consumption of coconuts increases by two.

Module 1.3 Comparative Advantage and Gains from Trade 21
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