AP_Krugman_Textbook

The benefits of specialization are the reason a person typically focuses on the produc-

tion of only one type of good or service. It takes many years of study and experience to be-

come a doctor; it also takes many years of study and experience to become a commercial

airline pilot. Many doctors might have the potential to become excellent pilots, and vice

versa, but it is very unlikely that anyone who decided to pursue both careers would be as

good a pilot or as good a doctor as someone who specialized in only one of those profes-

sions. So it is to everyone’s advantage when individuals specialize in their career choices.

Markets are what allow a doctor and a pilot to specialize in their respective fields.

Because markets for commercial flights and for doctors’ services exist, a doctor is as-

sured that she can find a flight and a pilot is assured that he can find a doctor. As long

as individuals know that they can find the goods and services that they want in the

market, they are willing to forgo self-sufficiency and are willing to specialize.

Comparative Advantage and Gains from Trade

The production possibilities curve model is particularly useful for illustrating gains

from trade—trade based on comparative advantage. Let’s stick with Tom stranded on his

island, but now let’s suppose that a second castaway, who just happens to be named

Hank, is washed ashore. Can they benefit from trading with each other?

It’s obvious that there will be potential gains from trade if the two castaways do dif-

ferent things particularly well. For example, if Tom is a skilled fisherman and Hank is

very good at climbing trees, clearly it makes sense for Tom to catch fish and Hank to

gather coconuts—and for the two men to trade the products of their efforts.

But one of the most important insights in all of economics is that there are gains

from trade even if one of the trading parties isn’t especially good at anything. Suppose,

for example, that Hank is less well suited to primitive life than Tom; he’s not nearly as

good at catching fish, and compared to Tom, even his coconut-gathering leaves some-

thing to be desired. Nonetheless, what we’ll see is that both Tom and Hank can live bet-

ter by trading with each other than either could alone.

For the purposes of this example, let’s go back to the simple case of straight-line

production possibilities curves. Tom’s production possibilities are represented by

the production possibilities curve in panel (a) of Figure 4.1, which is the same as the

24 section I Basic Economic Concepts

0 28 40

30

9

Quantity of fish

Quantity

of coconuts

60 10

20

8

Quantity of fish

Quantity

of coconuts

(a) Tom’s Production Possibilities (b) Hank’s Production Possibilities

Tom’s consumption

without trade Hank’s consumptionwithout trade

Tom’s

PPC

Hank’s

PPC

Production Possibilities for Two Castaways

Here, each of the two castaways has a constant opportunity cost of

fish and a straight-line production possibilities curve. In Tom’s case,

each fish always has an opportunity cost of^3 ⁄ 4 of a coconut. In

Hank’s case, each fish always has an opportunity cost of 2 coconuts.

figure 4.1

Photolibrary