Question

Peter and Laura are stranded on a tropical island. To feed themselves each day, they can either catch fish or collect coconuts. In one day, Laura can collect 120 coconuts or catch 60 fish, while in one day, Peter can collect 75 coconuts, or catch 50 fish.
Determine who has each of the following, and explain why:
a. absolute advantage in collecting coconuts

b. absolute advantage in fishing

c. comparative advantage in collecting coconuts

d. comparative advantage in fishing

e. To benefit from trade, who would collect coconuts and who would fish?

Answer 1

a) Laura

( Laura can collect 120 coconuts in a day while Peter can collect only 75. Absolute advantage refers to the ability to produce more than other country with the same cost. ln our case if refers to the ability to collect greater quantity of coconuts. Since Laura can collect 45 coconuts more than Peter, she has absolute advantage in collecting coconuts.)

b) Laura

( Since Laura can catch greater quantity of fishes ( 70-50=10) than Peter, she has absolute advantage in catching fish.)

c) Laura

d) Peter

e) Laura would collect cononuts and Peter would fish.

( Here, Laura has absolute advantage and Peter has absolute disadvantage in both catching fish and collecting coconuts. So trade is not possible based on the principle of absolute advantage. But comparative advantage theory states that mutually beneficial trade is possible even in the above mentioned situation. Comparative advantage should be taken as a criterion of trade.

Laura should exchange the commodity in which it's advantage is higher. It's evident that Laura's advantage is higher in collecting coconuts( 45 coconuts). Laura has comparative advantage in the collection of coconuts.

Peter should exchange the commodity in which his disadvantage is less . It's evident that, his disadvantage is less in catching fish.( Only 10 difference fish with Laura.) So, Peter has comparative advantage in the catching fish.

Trade would be beneficial if Laura exchanges coconuts for fish caught by Peter.)

in collecting coconuts.