ECON1210 Tutorial 02

Teaching assistant: Zhao Changming (Brant)

Email: king01@connect.hku.hk

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 Chapter 2 Power of Trade &
Comparative Advantage

üAbsolute & Comparative Advantage üToT

üSpecialization üWorld Price & CPC

üPPC

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1. Absolute & Comparative Advantage

Time required to complete a job: No. of Jobs completed in 12 hrs:

Painting Roofing Painting Roofing
Paul 4 hrs 3 hrs Paul 3 4
Ron 6 hrs 12 hrs Ron 2 1

Paul has an absolute advantage over Ron at both

painting and roofing, which means that Paul takes
fewer hours to perform each task than Ron does.

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Time required to complete a job: No. of Jobs completed in 12 hrs:
Painting Roofing Painting Roofing
Paul 4 hrs 3 hrs Paul 3 4
Ron 6 hrs 12 hrs Ron 2 1

Normalized:
Painting Roofing Painting Roofing
Paul 3/4
~ 1 or Paul 1
~ 4/3
Ron 2 ~ 1 Ron 1 ~ 1/2

Having a comparative advantage at a task means having a lower OC!

Ron has a comparative advantage over Paul at painting,

which means he is relatively more efficient at painting.
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Q1 (Past MT)

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No. of Jobs completed in a week: Normalized:
Scallops Shrimps Scallops Shrimps
Sophia 20 10 Sophia 1
~ 1/2
Terrence x 1 Terrence 1 ~ 1/x

1: x < 2 à 1/x > 1/2 à Sophia has comparative advantage at scallops

2: should be “if and only if x < 20”

The correct answer is D.

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2. Specialization

Time required to complete the job: No. of Jobs completed in 12h:

Painting Roofing Painting Roofing
Paul 4 hrs 3 hrs Paul 3 4
Ron 6 hrs 12 hrs Ron 2 1

Complete Specialization:
Paul only roofs and Ron only
paints.

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3. PPC: Production Possibilities Curve
No. of Job completed in 12h:
|slope| = OC Painting Roofing
Paul 3 4
Ron 2 1

|k1| = 3/4 |k2| = 2

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 1. Plus the x-intercepts => 5
2. Plus the y-intercept => 5
Combine PPCs 3. Mark the intercepts (5,0) and (0,5)
4. Flatter one on the top, steeper one at
the bottom
Include as many possibilities as we can! Construct the outermost curve!

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Q2

Steps:
1. Identify comparative advantages
2. Find the specialization point
3. Identify who will do the switch
4. Solve equation

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No. of Jobs completed in a week: Normalized:
Shelter Food Shelter Food
Andy 16 40 Andy 1
~ 2.5
Betty 20 36 Betty 1
~ 1.8

1.8 < 2.5 à Betty has a comparative advantage at shelter

à Specialization point (Food, Shelter) = (40, 20)
!""# *+ -.
à We want = > à Increase food, decrease shelter
$%&'(&) , *.

à Betty, who specializes in shelter, will do the switch

à Suppose Betty produces x pounds of food, then she reduces shelter by
/ -. 3 / *+
square yards à Solve ! = à x = 18
0.2 *. 4 ".$ ,
à 58 pounds of food and 10 square yards of shelter per week
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4. Terms of Trade (ToT)

We do not produce everything by ourselves. Or else we may have to

farm, hunt, wash toilet, teach tutorials…

We specialize and EXCHANGE!

The range of terms of trade lies between the O.C.s, otherwise I will
simply produce by myself.

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 Normalized:

Painting Roofing Painting Roofing

Paul 3/4
~ 1 or Paul 1
~ 4/3
Ron 2 ~ 1 Ron 1 ~ 1/2

Range of ToT:

0.75P ≤ 1𝑅 ≤ 2P or 0.5R ≤ 1𝑃 ≤ 1.33R

0.75P/R ~ 2P/R or 0.5R/P ~ 1.33R/P

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Q3

following statements are true.

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No. of Jobs completed in a day: Normalized:
Sandwiches Hamburgers Sandwiches Hamburgers
Chris 25 60 Chris 1
~ 2.4
Jenny 10 50 Jenny 1 ~ 5

o Chris has a lower O.C. in producing sandwich. Thus,

Chris has a comparative advantage in producing
sandwich.

o Under trade, Chris and Jenny will specialize in their

production according to their comparative advantage.
So, Chris will specialize in producing sandwich and Jenny
will specialize in producing hamburger.

o Range of ToT: 2.4H ≤ 1𝑆 ≤ 5H

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Q3

following statements are true.

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5. World Price & CPC

In a closed economy, people can only consume what they

produce. CPC = PPC.

In an open economy, consumption possibilities are

expanded by international trade. Again, Construct the
outermost curve!

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No. of Job completed a day:
Painting Roofing
Paul 3 4
Ron 2 1

|k1| = 3/4 = 0.75

|k2| = 2

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 Painting

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Scenario 1: |k1| < |k2| < |kc|

e.g. World Price:

Painting = $100, Roofing = $300
|kc| = 3 (P/R)

CPC: Consume any points on the

red line. 5 |kc|

Again: Construct the outermost |k1|

curve!

|k2|
Roofing
5
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Scenario 2: |k1| < |kc| < |k2|

e.g. World Price: Painting

Painting = $100, Roofing = $150

|kc| = 1.5 (P/R)

CPC: Consume any points on the

red line. 5

|k3|
Again: Construct the outermost |k1|
curve! (4,2)

|k2|
Roofing
5
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Scenario 3: |kc| < |k1| < |k2| CPC: Consume any points
on the red line.
e.g. World Price:
Again: Construct the
Painting = $100, Roofing = $50 outermost curve!
|kc| = 0.5 (P/R)
Painting

|k3|
|k1|

|k2|
Roofing
5 10
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Q4

10; 10

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Specialization
No. of Jobs completed in a week: Normalized:
Shelter Food Shelter Food
Ann 10 10 Ann 1
~ 1
Ben 6 3 Ben 2 ~ 1

o The price ratio = 3/2 = 1.5 S/F, which lies in between

the two opportunity costs, so we have full specialization.

o Ben will produce shelters only, and Ann will produce food
only.

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Q4

10; 10

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