A four step solution to solving the comparative advantage and gains ... [PDF]

13 Jun 2011 - Have each country specialize in their comparative advantage. 4. Figure out an allocation that makes each c

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Wednesday, December 13, 2017

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A four step solution to solving the comparative advantage and gains from trade problem.

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Labels: econ help, economics, microeconomics, opportunity cost, PPF You can solve these problems easily as long as you follow these 4 steps:

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1. Determine the opportunity costs of production.

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2. Figure out who has the comparative advantage.



3. Have each country specialize in their comparative advantage. 4. Figure out an allocation that makes each country better off. Today I will introduce the problem and give you some background information on PPFs (production possibility frontiers), the later steps will be covered in future posts. By looking at the table with the PPF information given to you, you should be able to determine the opportunity cost of production for each country’s (or individual’s) good. Below is an example table, of production in 1 day: Mexico Papayas 0 8 16 24

Apples 12 9 6 0

U.S. Papayas 0 7 14 21

Apples 63 42 21 0

You might also see it in the following form: Mexico Papayas Apples

Hours to produce 1 1 2

Quantity per day 24 12

Don’t let this confuse you, it is telling you the same information, they are just in different forms. Do you see how the

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table, then figure out how much each country could produce if they specialized in each good. This is the only information you will need to calculate the opportunity cost.

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a certain time frame, it would be the US in apples (63 vs 12) and Mexico in papayas (24 vs 21).

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Here is what the PPF looks like for this two country case:

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