A Tale of Two Tribes
On an island, there lived
two isolated tribes,
Portigia
Engia
In order to survive, they needed to
catch fish from the sea and collect
wood from the forest. There were 20
workers in each tribe.
In one day,
the workers of Engia could collect
120 units of fish
OR
80 units of wood
In one day,
the workers of Portigia could collect
160 units of fish
OR
200 units of wood
Initially, the chief of each tribe assigned 10
workers to collect wood and the other 10 to
catch fish. All of them were satisfied with this
arrangement.
Chief of Portigia
Chief of Engia
One day, an adventurer called David arrived.
He discovered these tribes.
He was surprised to find that their production
arrangement was so inefficient.
Based on my training in
economics, I am confident
that I can improve your living
standard by changing the
production arrangement.
David
????
????
Chief of Portigia
Chief of Engia
Then he urged the chiefs to discuss this issue.
David
Chief of Portigia
Chief of Engia
Based on my
knowledge in
economics,
specialization would
increase output.
Trade would improve
living standards. Why
don't you do that?
David
I don't think the
Portigians will
cooperate with
our tribe because
they are more
superior and
productive. How
will they do that
without any
benefit?
Chief of Engia
We can collect more wood and
catch more fish than they can with
the same number of workers. We
may suffer if we trade with them.
I can't see any reason for
cooperation.
Chief of Portigia
Chief of Engia
????
????
Let me tell you
my plan.
David
Chief of Portigia
You,
the chief
of
Don't
worry,
Portigia
Engia,
all tribe
your
willshould
provideask
your
workers
to catch
and
with wood
if youfish
give
fish
collecttonothem.
wood..
No, we will
die of cold if we
don't have wood
to burn at night.
David
Chief of Engia
Since you are more productive in both tasks, I don't advise
you to do only one task. I suggest that you should send 15
workers to collect wood and 5 workers to catch fish. Also, don't
worry about the fish; you can get them from Engia. I guarantee
that both of you can get more fish and wood than before if you
follow my suggestion.
Chief of Portigia
David
After the conversation, both chiefs still
hesitated to follow David's plan.
Chief of Portigia
Chief of Engia
Can David’s plan raise the outputs
of wood and fish for the two tribes
in total?
Activity 1
1. Which tribe is better at collecting wood: Engia or
Portigia?
Portigia
2. Which tribe is better at catching fish: Engia or
Portigia?
Portigia
Activity 1
3. Before the arrival of David
Daily Output / goods available
The initial situation
Engia
Portigia
Total
Wood
Fish
(Units)
(Units)
40
and
100
140
and
60
80
140
Activity 1
4. After David’s plan is adopted
Daily Output
David’s plan
Engia
Portigia
Total
Wood
Fish
(Units)
(Units)
0
150
150
and
120
40
and
160
Activity 1
5. After they have adopted David's plan, do
they have more output as a whole? How
much additional wood can they collect?
How much additional fish they can catch?
As a whole, they can produce more. With
the same amount of resources, they can
collect 10 more units of wood and catch
20 more units of fish.
Activity 1
6. After trade
Goods Available
After Trade
Engia
Portigia
Total
Wood
Fish
(Units)
(Units)
45
105
150
and
75
85
and
160
Activity 1
7. The gains from trade
Gains from trade
Engia
Portigia
Total
Wood
Fish
(units)
(units)
5
5
10
and
15
5
and
20
Can you explain why they can
produce more output with the
same amount of resources?
Definitions
• Absolute advantage: the ability to produce
more units of a good or service than some
other producers using the same quantity of
resources.
• Comparative advantage: the ability to
produce a good or service at a lower
opportunity cost than another producer.
Portigia has the absolute advantage both
in collecting wood and catching fish.
However, she has the comparative
advantage only in collecting wood,
whereas Engia has the comparative
advantage in catching fish.
Opportunity cost of wood
(a) What is the opportunity cost of producing 1 unit of
wood in terms of fish in Engia?
1.5 units of fish
(b) What is the opportunity cost of producing 1 unit of
wood in terms of fish in Portigia?
0.8 units of fish
(c) Which tribe has the comparative advantage in
collecting wood?
Portigia has the comparative advantage in collecting
wood because she gives up less fish than Engia.
Opportunity cost of fish
(d) What is the opportunity cost of producing 1 unit of fish
in terms of wood in Engia?
0.67 units of wood
(e) What is the opportunity cost of producing 1 unit of fish
in terms of wood in Portigia?
1.25 units of wood
(f) Which tribe has the comparative advantage in catching
fish?
Engia has the comparative advantage in catching fish
because she gives up less wood than Portigia does.
Conclusion
Although Portigia has the absolute
advantage in both activities, she has the
comparative advantage in collecting
wood only. When Engia and Portigia
specialize in the activity which each has
the comparative advantage and trade,
both are better off.