Gains from Trade
You find yourself in a lonely oasis in the desert. The only two things you can produce are either dates or water. In a day you can either gather 100 dates or collect 50 liters of water. And you choose to spend 4 days a week gathering dates and 3 days a week collecting water.
a) What are your opportunity costs of water and dates?
Now imagine in the neighbor oasis is Mohammed and he can produce in a day either 150 dates or 60 liters of water. And he chooses to spend 4 days a week gathering dates and 3 days a week collecting water.
b) What are Mohammed’s opportunity costs of water and dates?
c) Who has an absolute advantage in dates and water production and who has a comparative advantage in dates and water production?
d) How many dates and liters of water are you and Mohammed producing per week before trade?
e) How many dates and liters of water are you and Mohammed producing after you decided to trade with each other? (Hint: Each one Specializes)
f) Think of an exchange that would make both parties better off than before they decided to trade with each other.