How do people and nations gain from specialization and trade?

Island Scenario  Chuck = castaway  Pirate Jack  Would trade between the two make life better for either of them?

The Castaway’s Dilemma: Self- Sufficiency or Interdependence  Island’s two main economic activities: gathering wild coconuts and digging clams  Would they be better off working separately and fending for themselves or joining forces and working together?

The Castaway’s Dilemma: Self- Sufficiency or Interdependence CoconutsClams Chuck the Castaway 10 per hour 40 per day Jack the Pirate 30 per hour15 per hour 120 per day60 per day Who has the absolute advantage in over all food production? Why might Jack think he’s better off to work alone? Do you agree?

Comparative Advantage Comparative advantage—your opportunity cost is lower David Ricardo (1817) developed this theory in response to the Corn Laws Corn laws = tariffs placed on imported grain in order to raise its price and protect English grain growers. Ricardo argued this was dumb. Why?

Create a PPF based on the chart. If Jack produces 90 coconuts per day, how many clams will he produce? If Chuck produces 20 clams, how many coconuts will he produce?

Calculating Opportunity Cost Chuck: for every 10 clams, he gives up 10 coconuts  opportunity cost for 1 clam = 1 coconut Jack: for every 15 clams, he gives up 30 coconuts  opportunity cost for 1 clam = 2 coconuts What are Chuck and Jack’s opportunity costs for collecting coconuts? Who has the comparative advantage in each?

Gains from Trade (17 coconuts = 25 clams) No TradeWith Trade Gains Production Consumption Production Consumption ChuckCoconuts Clams JackCoconuts Clams

Comparative Advantage Applies to Nations as Well as Individuals  Florida  oranges (has a comparative advantage due to climate)  Idaho  potatoes  Nevada  gold  Saudi Arabia  oil  Canada  timber  US  computer systems (education level)  China  clothing (low-wage workforce)