Production Possibilities (Per Week)
"Same example as before John & Jane from Lecture 3"
John 10 2
Jane 16 8
Jane has Absolute Advantage in production of cloth and corn.
Q: Can Jane and John both still gain from trade?
A: Yes, comparative advantage, NOT absolute advantage, is what matters
OC of Producing One Unit of
John 0.2 corn 5 cloth Jane 0.5 corn 2 cloth
Jane now has an absolute advantage in the production of both cloth and corn. Yet John has a
comparative advantage in the production of cloth, while Jane has a comparative advantage in the
production of corn.
Jane is now twice as productive in production of both cloth and corn as in Ex. 1 (where she
could produce 8 cloth or 4 corn), so her OC of producing each has not changed.
Before trade, John and Jane divide their time equally between the production of clothing and
John 5 1
Jane 8 4
Total 13 5
After trade, John specializes completely in the production of cloth, while Jane now allocates
75% of her time to the production of corn.
John 10 0
Jane 4 6
Total 14 (+1) 6
With unchanged resources (PPFs), total output is higher if John/Jane specialize in production of
the good in which each has a comparative advantage
Comparative advantage, NOT absolute advantage, matters (an intuitive example)
Bill Gates (Microsoft): Should he write computer program?
1. Time to write computer program
Gates: 3 hours
Consultant: 10 hours
Does Gates have a comparative advantage?
What is OC of time? 3. Next best alternative
Gates earn $10,000 per hour as executive
Consultant earns $100 per h