Question

Opportunity cost, comparative advantage and gains from trade. Ali and Barb both like making bread and jam. In one day Ali can make 10 loafs of bread OR 20 jars of jam. In one day Barb can make 6 loafs of bread OR 36 jars of jam.

3g) Has specializing in their comparative advantage good made them better off overall? Explain your answer fully, including explaining what is meant by ‘comparative advantage’.

Answer 1

3G.

Comparative advantage means producing goods with lower opportunity cost than the rivals. In the above answer, it can be seen that Ali is producing breads with less number of jars of jam foregone, than that of Barb. It makes Ali to hold comparative advantage in producing bread and do specialization in it. Afterwards, Ali can go for the trade. The same applies to barb and he has comparative advantage in producing jam.

After specialization & Trade,

Ali has 7 loafs of bread and 12 jars of jam

If Ali had to produce 12 jars of Jam, then he had to forego 6 loafs of bread. So, without trade, he could have only 4 loafs of bread and 12 jars of jam that is less than, the after trade situation that make Ali having 7 loafs of bread and 12 jars of jam. So, Ali is better off with the trade.

Now, After specialization & Trade,

Barb has 3 loafs of bread and 24 jars of jam.

If Barb had to produce 3 loafs of bread on his own, then he has to forego 18 jars of jam (opportunity cost). So, he could have only  3 loafs of bread and 18 jars of jam without trade that is less than the consumption bundle after trade that is  3 loafs of bread and 24 jars of jam. It makes Barb to be better off after the trade.

So, above calculations and explanations prove that both of Ali and Barb get better of after the trade with each other.