Question 1 (c)
Trade can make everyone better off
4 marks
- Time to write
- About 8 minutes
Question
Question 1 (c) · 4 marks“Trade can make everyone better off”. Give an example to prove it.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- exampleExamples are asked for: one short example with each point.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 The principle and the idea of comparative advantage 1 mark 2 min
- 2 A worked example with opportunity costs 2 marks 3 min
- 3 Why both parties gain 1 mark 2 min
Short on time? Step 2 carries 2 of the 4 marks: guard its minutes.
Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The principle. Trade is not a contest in which one side's gain is the other's loss; both sides can end up better off. The reason is comparative advantage: a person or a country has a comparative advantage in a good when it can produce that good at a lower opportunity cost than the other party, and each side gains by specialising in the good it produces at the lower opportunity cost and trading for the other. This holds even when one side is better at producing both goods (absolute advantage in both).
Example: Kavya and Rohan. Our own example. In one working day Kavya can bake 20 cakes or stitch 10 kurtas; Rohan can bake 6 cakes or stitch 6 kurtas. Kavya is better at both.
| Cakes in a day | Kurtas in a day | Opportunity cost of 1 kurta | Opportunity cost of 1 cake | |
|---|---|---|---|---|
| Kavya | 20 | 10 | 2 cakes | 0.5 kurta |
| Rohan | 6 | 6 | 1 cake | 1 kurta |
Rohan gives up fewer cakes for a kurta (1 against Kavya's 2), so he has the comparative advantage in kurtas; Kavya gives up less for a cake (0.5 kurta against Rohan's 1), so she has it in cakes.
- Without trade, each spends half the day on each good: Kavya gets 10 cakes and 5 kurtas; Rohan gets 3 cakes and 3 kurtas.
- With specialisation, Kavya bakes all day (20 cakes) and Rohan stitches all day (6 kurtas). They agree to swap at 1.5 cakes for 1 kurta: Kavya gives Rohan 6 cakes for 4 kurtas.
- After trade, Kavya has 14 cakes and 4 kurtas, and Rohan has 6 cakes and 2 kurtas.
Why both gain. Compare with the no-trade bundles. Kavya gives up 1 kurta but gains 4 cakes; a kurta costs her 2 cakes to make herself, so she is better off by 2 cakes' worth. Rohan gives up 1 kurta but gains 3 cakes; a kurta costs him only 1 cake, so he too is better off by 2 cakes' worth. The swap rate of 1.5 cakes a kurta lies between their two opportunity costs (1 and 2 cakes), which is what lets both gain. Total output also rises: specialisation gives 20 cakes and 6 kurtas against 13 cakes and 8 kurtas before, and the 7 extra cakes more than make up for the 2 fewer kurtas at either person's opportunity cost.
Conclusion. Specialisation by comparative advantage, followed by exchange at a rate between the two opportunity costs, leaves both traders better off, even though Kavya is more productive at everything. The same reasoning applies between states or countries.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | The principle and the idea of comparative advantage | 1 |
| 2 | A worked example with opportunity costs | 2 |
| 3 | Why both parties gain | 1 |
| Total | 4 |
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