Question

There are two countries A and B. County A is producing 3 units of corn and 7 units of clothing at point A. Country B is producing 2 units of corn, and 11 units of clothing at point B. See figure below. Using the shortcut rule, the steeper line has comparative advantage in the vertical axis, which is A in corn. Complete specialization means using all your resources to produce that good in which you have comparative advantage. A then will only produce corn of 9 units and B will produce 20 of clothing (the intercepts show max production for each). If A gives 4 units of corn for 8 units of clothing they will be left with the following. A will have 5 units of corn and 8 units of clothing, B will have 4 units of corn and 12 units of clothing. Thus compared to no trade, they are both better with trade, because there is a net gain of 2 units of corn and 1 unit of clothing for each, as shown in the table below.

                        No trade                      Specialization               Trade                  Net Gain from Trade

                        A          B                      A          B                      A          B                      A          B         

Corn                 3          2                      9          0                      5          4                      2          2

Clothing           7          11                    0          20                    8          12                    1          1

Illustrate the gains from trade by creating up your own unique example. Explain your logic behind your example. Please create an example and explain the steps on how to do this.

Answer 1

Comparative advantage is a situation where any country (person) can produce the goods at a lower opportunity cost.

In them example above, each country is producing that good in which it specializes and then trade with the other country. The specialization provides both the countries with increased consumption (consumption beyond the PPC curve).

A similar example could be :

Let us assume there are two countries A and B, producing two goods 1 and 2

No Trade

Country A	10	5
Country B	8	2

Now, if we look at the opportunity cost then we see that:

Country A can produce 2 units of good 2 and 0.5 units of good 1

Country B can produce 4 units of good 2 and 0.25 units of good 1

Without trade the total volume of goods produced is 18+7 = 25 units

If these countries specializes in good 1 and 2 respectively then the total output produce will be greater than without trade.

Let's assume that we have 120 units to produce good 1 and 2 then:

If country A produces only good 1 then it can produce 12 units (120/10) and Country B produces only good 2 then it can produce 60 units (120/2). Then total quantity of goods produced is 72 units.

With trade and Specialization

Country A	12	0
Country B	0	60

Hence, both the countries are better of after trading.