Suppose you are shipwrecked alone on a desert island.

With your survival skills you find that in one day you can:
- catch 2 fish if you spend all day at it
- gather 8 coconuts if you spend all day at it

Suppose you work at producing food 6 days a week.

In one week, you could produce:
- 12 fish if you spent all of #C
your time fishing
- 48 coconuts if you spent all 48 PP
of your time gathering
- a combination of the two
goods if you split your time

“production possibilities” - PP 12 #F
Since you are alone, you can #C
consume only as much as you
can produce. 48
PP = CP
Your consumption
possibilities (CP) are equal to
your production possibilities.

12 #F
Suppose you discover that Shipwreck Sherry has been marooned
on a nearby island.

In one day Sherry can:

- catch 1 fish if she spends all day at it
- gather 6 coconuts if she spends all day at it

In one week, she could produce:

- 6 fish if she spent all of her #C
time fishing
- 36 coconuts if she spent all
of her time gathering
- a combination of the two 36 PP = CP
goods if she split her time

6 #F
Clearly you can produce more of each good with a given amount
of time. (You have absolute advantage in producing each good.)

Is it worth it for you to trade with Sherry?

Your “cost” of fishing for one day is the number of coconuts you
forgo during that time.

Your opportunity cost of fishing is the number of coconuts you

give up during that time.

In general:
opportunity cost of
getting one unit of = amount of B sacrificed = X units of B
good A amount of A gained
Your opportunity cost of catching 1 fish = loss of 8C = 4 coconuts
gain of 2F

Sherry’s opportunity cost of catching 1 fish = loss of 6C = 6 coconuts

gain of 1F

You give up fewer coconuts while fishing than Sherry does.

You have a lower opportunity cost of fishing than Sherry does.

You have comparative advantage in fishing.

Comparative advantage is the ability to produce at the lowest

opportunity cost.
 Your opportunity cost of gathering loss of 2F
1 coconut = gain of 8C = 1/4 fish

Sherry’s opportunity cost of gathering

loss of 1F
1 coconut =
gain of 6C = 1/6 fish
Sherry gives up fewer fish while gathering coconuts than you do.

Sherry has a lower opportunity cost of gathering coconuts than you

do.

Sherry has comparative advantage in gathering coconuts.

So what if you each specialized in the production of the good that
you had comparative advantage in and then traded?

You would specialize in fishing and Sherry would specialize in

coconuts.

The two of you would need to negotiate a rate to trade fish for
coconuts.

The “price” of a fish will be between 4 and 6 coconuts.

- Your personal cost of 1 fish is 4 coconuts.
- You’d be willing to part with a fish for 4 or more coconuts.

- Sherry’s cost of 1 fish is 6 coconuts.

- She’d be willing to pay 6 or fewer coconuts for 1 fish.

The “price” of a coconut will be between 1/4 and 1/6 of a fish.

 Suppose that you negotiate a rate of 1 fish for 5 coconuts.

Sherry’s production: Sherry’s consumption:

- PP are still the same - could consume all 36 coconuts
- specializes in coconuts
- chooses to produce 36 - If she traded away all her
coconuts coconuts, what is the maximum
number of fish she could
consume?
#C 1F = ?F
PP 7.2F
5C 36C
36 CP - Her consumption possibilities
are greater than her production
possibilities.
Trade makes Sherry better off!
6 7.2 #F
 Your production: Your consumption:
- PP are still the same - could consume all 12 fish
- specialize in fish
- choose to produce 12 - If you traded away all your
fish fish, what is the maximum
number of coconuts you could
consume?

1F = 12F
5C ?C 60 C
#C
60 PP - But sherry can at most produce
36 coconuts!
48 CP - Your consumption possibilities
36
are still mostly greater than your
production possibilities.
Trade can make you better off!
12 #F
In general, with specialization and trade, both parties can be
made better off.

consumption possibilities > consumption possibilities

with trade with no trade

In a nutshell, this is why international trade is good and can be

good for all countries involved.