COMPARATIVE ADVANTAGE AND THE GAINS FROM TRADE
John 10 2
Jane 16 8
Jane has absolute advantage in production of both cloth and corn.
Can Jane and John both still gain from trade?
Opportunity Cost of Production 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.
Observation: Jane is now twice as productive in production of cloth and corn as in Example 1
(where she could produce 8 cloth or 4 corn), so her opportunity cost of production each has not
Before trade, John and Jane divided their time equally between the production of cloth and corn. Production (Before trade)
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 ot the production of corn.
Production (After Trade)
John 10 0
Jane 4 6
Total 14(+1) 6(+1)
1. With unchanged resources (PPFs), total output is higher if trade allowed.THERE ARE
GAINS FROM TRADE
2. If Jane allocates 100% of her time to corn, then (after tade)
John 10 0
Jane 0 8
Total 10 (-3) 8 (+3)
If Jane specializes but not completely allocates her time to the production in which she has a
comparative advantage, it demonstrates the gains from trade (higher output).
- Used to demonstrate with unchanged resources, that trade will allow a higher total
● Jane has absolute advantage in production of cloth and corn.
Equivalently, she can product each good at a lower absolute cost than John
● Cost of production 1 cloth:1/16 week for Jane vs 1/10 week for John
● Cost of production 1 corn: ⅛ week for Jane vs ½ week for John. Economic Fallacy
High-wage countries such as Canada cannot compete with low wage countries such as China