Question

Let's say there are two guys on an island. Fred, who is good at fishing, and Jack, who is good at cutting trees. They just got to the island, so they have no shelter. They also don't have food. They can both fish and cut trees, but the real question is, what do they gain by trading? I'm not talking about numbers, I'm asking you, what will the passive benefits be of having an economy on the island, versus them having to do both fishing and tree cutting?

Answer 1

If both of them fishing and cutting trees in that case Fred will be catching more fishes by investing same resource in comparison to Jack on the other hand Jack will be more efficient in cutting trees in comparison to Fred. That is if they are doing everything on their own in that case the output of the economy will be low. Both will be less of each good as they don't have expertise in both of the activity.

The best will happen when they specialize in their area. Fred is good at catching fishes therefore he must use his resources only in catching fishes. Overall output of fish in the economy will increase due to specialization. Similarly Jack should specialize in cutting trees this will maximize the cutting trees. Hence, both goods output will be highly efficient then through trade both get benefitted.

Through specialization every one get better off.

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