Finance and the Economy · Seminar 10 · Global business and economics
Jon can catch 10 fish or gather 40 coconuts in a day; Marie can catch 20 fish or gather 200 coconuts. Marie has the absolute advantage in both, yet both gain by specialising and trading, because their opportunity costs differ. Set how each spends the day and what they swap, and watch consumption move beyond the frontier. Question 2, from Business Economics (Mankiw, Taylor & Ashwin, ch. 23).
Jon consumes
Marie consumes
Jon’s gain vs no trade
Marie’s gain vs no trade
| Opportunity cost | Jon | Marie | Comparative advantage |
|---|---|---|---|
| of one fish | 40 ÷ 10 = 4 coconuts | 200 ÷ 20 = 10 coconuts | Jon (gives up fewer coconuts) |
| of one coconut | 10 ÷ 40 = 0.25 fish | 20 ÷ 200 = 0.1 fish | Marie (gives up less fish) |
Why nobody can have a comparative advantage in both. The opportunity cost of coconuts is the reciprocal of the opportunity cost of fish. If Marie’s cost of a fish (10 coconuts) is higher than Jon’s (4), her cost of a coconut (1/10 fish) must be lower than his (1/4). Opportunity costs move in opposite directions, which is Ricardo’s law of comparative advantage. Trade at any rate between 4 and 10 coconuts per fish makes both better off.
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