Worksheet: Comparative Advantage and Specialization

[Pages:3]Worksheet: Comparative Advantage and Specialization

Stewie and Brian are stuck on an island and have no way to call for help. Luckily, there are enough resources for them to take care of themselves by catching fish and picking coconuts. They have the following abilities:

Stewie can catch 8 fish every hour or pick 20 coconuts every hour.

Brian can catch 12 fish every hour or pick 3 coconuts every hour.

These activities are mutually exclusive. That means that one person can't do both at the same time. Because of that, catching fish means that you have to give up some coconuts, and picking coconuts forces you to give up some fish. Economists call the amount of one thing you must give up to get one more of another thing Opportunity Cost. Opportunity costs are expressed as ratios or fractions.

Answer the following questions:

If Stewie catches one more fish, how many coconuts does he have to give up? That is, what is Stewie's opportunity cost of fish?

20 coconuts : 8 fish = 2.5 coconuts : 1 fish (divide both sides by 8)

If Stewie picks one more coconut, how many fish does he have to give up? That is, what is Stewie's opportunity cost of coconuts?

If Brian catches one more fish, how many coconuts does he have to give up? That is, what is Brian's opportunity cost of fish?

If Brian picks one more coconut, how many fish does he have to give up? That is, what is Brian's opportunity cost of coconuts?

Comparative Advantage means that you can do something for the lowest opportunity cost.

Who has the comparative advantage in catching fish? That is, who has the lowest opportunity cost of fish?

Who has the comparative advantage in picking coconuts? That is, who has the lowest opportunity cost of coconuts?

The sun is up for 12 hours each day. Answer the following questions: At most, how many fish can Stewie catch in a day? 12 hours * 8 fish/hour = 96 fish At most, how many coconuts can Stewie pick in a day? At most, how many fish can Brian catch in a day? At most, how many coconuts can Brian pick in a day?

Stewie and Brian don't like each other, so they've moved to different sides of the island. That means that they'll each have to spend some time catching fish, and some time picking coconuts. Let's say that they both spend half the day (6 hours out of 12) doing each.

How many fish can Stewie catch in half a day? 6 hours * 8 fish/hour = 48 fish How many coconuts can Stewie pick in half a day? How many fish can Brian catch in half a day? How many coconuts can Brian pick in half a day?

In Economics, we use tables to display information like this. Fill in the table below using the numbers you just got, then add up the total number of fish and the total number of coconuts to find out how much they both got all together:

If they spend half a day...

Fish

Stewie

48

Brian

TOTAL

Coconuts

After living like this for a few days, Brian finds a copy of our microeconomics textbook floating in the waves. He reads the part about Comparative Advantage and Specialization, and tells Stewie that they should try specializing in the activity they have comparative advantage in, or have the lowest opportunity cost. At the end of every day, they'll trade some of what they got. Should Stewie catch fish or pick coconuts? Should Brian catch fish or pick coconuts?

Should they both do the same thing? Why or why not?

Let's find out how much of each they could get if they specialized in what they were best at. Remember, if they specialize, that means each person spends the whole day doing one thing and spends no time doing the other. Fill in the table below using the numbers you got earlier:

If they specialize...

Fish

Stewie

Brian

TOTAL

Coconuts

Now that we know how much of each they can have by themselves and specializing, we can find out what the gains of trade are. Fill in the table below using the totals you got in the other

tables:

Gains from Trade Table

Fish

Specializing

By Themselves

= DIFFERENCE

Coconuts

Would you say that they are better off by specializing? Why or why not?

*** CRITICAL THINKING QUESTION: What is the most coconuts a fish can cost for them to trade? ______________ What is the most fish a coconut can cost for them to trade? _______________

Hint: They won't specialize and trade if it's cheaper to just do both themselves!

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