2. A Tale of Two Tribes

3. Engia Portigia On an island, there lived two isolated tribes,

4. In order to survive, they needed to catch fish from the sea and collect wood from the forest. There were 20 workers in each tribe.

5. In one day, the workers of Engia could collect 120 units of fish 80 units of wood OR

6. In one day, the workers of Portigia could collect 160 units of fish 200 units of wood OR

7. Initially, the chief of each tribe assigned 10 workers to collect wood and the other 10 to catch fish. All of them were satisfied with this arrangement. Chief of Portigia Chief of Engia

8. One day, an adventurer called David arrived. He discovered these tribes.

9. He was surprised to find that their production arrangement was so inefficient. Based on my training in economics, I am confident that I can improve your living standard by changing the production arrangement. ???? David Chief of Portigia Chief of Engia

10. Then he urged the chiefs to discuss this issue. Chief of Portigia David Chief of Engia

11. Based on my knowledge in economics, specialization would increase output. Trade would improve living standards. Why don't you do that? David

12. Chief of Engia I don't think the Portigians will cooperate with our tribe because they are more superior and productive. How will they do that without any benefit?

13. We can collect more wood and catch more fish than they can with the same number of workers. We may suffer if we trade with them. I can't see any reason for cooperation. Chief of Portigia

14. Let me tell you my plan. ???? Chief of Portigia David Chief of Engia

15. No, we will die of cold if we don't have wood to burn at night. You, the chief of Engia, should ask all your workers to catch fish and collect no wood.. Don't worry, Portigia will provide your tribe with wood if you give fish to them. David Chief of Engia

16. Since you are more productive in both tasks, I don't advise you to do only one task. I suggest that you should send 15 workers to collect wood and 5 workers to catch fish. Also, don't worry about the fish; you can get them from Engia. I guarantee that both of you can get more fish and wood than before if you follow my suggestion. Chief of Portigia David

17. After the conversation, both chiefs still hesitated to follow David's plan. Chief of Portigia Chief of Engia

18. Can David’s plan raise the outputs of wood and fish for the two tribes in total?

19. 1.Which tribe is better at collecting wood: Engia or Portigia? Activity 1 Portigia 2.Which tribe is better at catching fish: Engia or Portigia? Portigia

20. 3. Before the arrival of David The initial situation Daily Output / goods available Wood (Units) Fish (Units) Engia and Portigia Totaland 40 60 100 80 140 Activity 1

21. 4. After David’s plan is adopted David ’s plan Daily Output Wood (Units) Fish (Units) Engia and Portigia Totaland 0 120 15040 150 160

22. Activity 1 5. After they have adopted David's plan, do they have more output as a whole? How much additional wood can they collect? How much additional fish they can catch? As a whole, they can produce more. With the same amount of resources, they can collect 10 more units of wood and catch 20 more units of fish.

23. Activity 1 6. After trade After Trade Goods Available Wood (Units) Fish (Units) Engia and Portigia Totaland 45 75 10585 150 160

24. Activity 1 7. The gains from trade Gains from trade Wood (units) Fish (units) Engia and Portigia 5 15 5 5 Total 10 20 and

25. Can you explain why they can produce more output with the same amount of resources?

26. Definitions Absolute advantage: the ability to produce more units of a good or service than some other producers using the same quantity of resources. Comparative advantage: the ability to produce a good or service at a lower opportunity cost than another producer.

27. Portigia has the absolute advantage both in collecting wood and catching fish. However, she has the comparative advantage only in collecting wood, whereas Engia has the comparative advantage in catching fish.

28. (a)What is the opportunity cost of producing 1 unit of wood in terms of fish in Engia? 1.5 units of fish (b)What is the opportunity cost of producing 1 unit of wood in terms of fish in Portigia? 0.8 units of fish (c)Which tribe has the comparative advantage in collecting wood? Portigia has the comparative advantage in collecting wood because she gives up less fish than Engia. Opportunity cost of wood

29. (d)What is the opportunity cost of producing 1 unit of fish in terms of wood in Engia? 0.67 units of wood (e)What is the opportunity cost of producing 1 unit of fish in terms of wood in Portigia? 1.25 units of wood (f)Which tribe has the comparative advantage in catching fish? Engia has the comparative advantage in catching fish because she gives up less wood than Portigia does. Opportunity cost of fish

30. Conclusion Although Portigia has the absolute advantage in both activities, she has the comparative advantage in collecting wood only. When Engia and Portigia specialize in the activity which each has the comparative advantage and trade, both are better off.