A Tale of Two Tribes

Engia

Portigia

On an island, there lived two isolated tribes,

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

80 units of wood

OR

In one day, the workers of Portigia could collect

160 units of fish

200 units of wood

OR

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 PortigiaChief 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.

Chief of Portigia

David

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

Chief of Engia

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 ben

efit?

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

Let me tell you my plan.

????

????

Chief of Portigia

David

Chief of Engia

No, we will die of cold if we don't have wood to burn at night.

You, the chief of Engia, should ask all your workers to catch fish an

d collect no wood..

Don't worry, Portigia will provide your tribe with wood if you give fish to

them.

DavidChief 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 befor

e if you follow my suggestion.

Chief of PortigiaDavid

After the conversation, both chiefs still hesitated to follow David's plan.

Chief of PortigiaChief of Engia

Can David’s plan raise the outputs of wood and fish for the two tribes

in total?

1. Which tribe is better at collecting wood: Engia or Portigia?

Activity 1

Portigia

2. Which tribe is better at catching fish: Engia or Portigia?

Portigia

3. Before the arrival of David

The initial situationDaily Output / goods available

Wood(Units)

  Fish(Units)

Engiaand

Portigia

Total and

40 60

100 80

140 140

Activity 1

Activity 14. After David’s plan is adopted

David’s planDaily Output

Wood(Units)

  Fish(Units)

Engiaand

Portigia

Total and

0 120

150 40

150 160

Activity 15. 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 16. After trade

After TradeGoods Available

Wood(Units)

  Fish(Units)

Engiaand

Portigia

Total and

45 75

105 85

150 160

Activity 17. The gains from trade

Gains from trade

Wood(units)

  Fish(units)

Engiaand

Portigia

5 15

5 5Total 10 20and

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 c

atching fish.

(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 wood

(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.

Opportunity cost of fish

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.