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FIGURE 1.3-2 Comparative Advantage and Gains from Trade

(a) Alexis’s Production and Consumption (b) Jacob’s Production and Consumption
Quantity Quantity
of coconuts of coconuts
30 Alexis’s consumption
without trade Jacob’s production
with trade
Alexis’s consumption
with trade 20 Jacob’s consumption
with trade
Alexis’s
10 production 10 Jacob’s consumption
9 with trade 8 without trade
Alexis’s Jacob’s
PPC PPC
0 28 30 40 0 6 10
Quantity of sh Quantity of sh

By specializing and trading, the two castaways can produce and coconuts — specializes in gathering coconuts. The result is that
consume more of both goods. Alexis specializes in catching each castaway can consume more of both goods than either could
fish, her comparative advantage, and Jacob — who has an abso- without trade.
lute disadvantage in both goods but a comparative advantage in

Table 1.3-2 How the Castaways Gain from Trade

Gains from
Without Trade With Trade Trade
Production Consumption Production Consumption
Alexis Fish 28 28 40 30 + 2
Coconuts 9 9 0 10 +1
Jacob Fish 6 6 0 10 + 4
Coconuts 8 8 20 10 + 2

So both castaways are better off when they each specialize in what they are good at
and trade with each other. It’s a good idea for Alexis to catch the fish for both of them,
because her opportunity cost of catching a fish is relatively low and she therefore has a
comparative advantage in catching fish. Correspondingly, it’s a good idea for Jacob to
gather coconuts for both of them.
Or we could describe the situation in a different way. Because Alexis is so good
at catching fish, her opportunity cost of gathering coconuts is relatively high, which
gives her a comparative disadvantage in gathering coconuts. Because Jacob is relatively
bad at fishing, his opportunity cost of gathering coconuts is much lower, giving him a
comparative advantage in gathering coconuts.
It might seem as though Alexis has nothing to gain from trading with less com-
petent Jacob. But we’ve just seen that Alexis can indeed benefit from a deal with Jacob
because comparative, not absolute, advantage is the basis for mutual gain. It doesn’t mat-
ter that it takes Jacob more time to gather a coconut; what matters is that for him,
the opportunity cost of that coconut in terms of fish is lower. So, despite his absolute
disadvantage in both activities, Jacob’s comparative advantage in coconut gathering
makes mutually beneficial trade possible.

22 Macro • Unit 1 Basic Economic Concepts
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Strictly for use with its products. For review purposes only. Not for redistribution.

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