How to finish solving your comparative advantage, or gains from trade problem - FreeEconHelp.com, Learning Economics... Solved!

## 6/18/11

Now we have to determine who has the comparative advantage in each good. Luckily they both don’t have the same opportunity costs, otherwise there would be no potential for gains from trade. Lets look at papayas first:

US’s opportunity cost of a papaya is 3 apples.

Mexico’s opportunity cost of a papaya is ½ an apple.

So Mexico has the lower opportunity cost of producing a papaya so Mexico should specialize in papayas, and this leaves the US to specialize in apples. With both countries producing only what they have their comparative advantage in, the world economy now has more stuff.
A total of 63 apples and 24 papayas, where as before, with each producing some of both goods, we had a total of 51 apples and 15 papayas. So by specializing, we got more of both goods!

Now we have to determine what the possible grains from trade are. In order to do this we have to have some initial production values for the goods. For this example, I will assume that the US was producing 42 apples, and 7 papayas, and that Mexico was producing 9 apples, and 8 papayas. When we add these numbers together, we get a total of 51 apples, and 15 papayas (the numbers that were mentioned earlier).

Now after specialization, we see that there are a total of 63 apples and 24 papayas in the economy. At this point what you do is arbitrary, but I think the first goal should be to allow the countries to consume what they were originally producing.