Solution

Without trade they both get 20. With trade, they create 40 of what they don’t want and trade it for 40 of what they want.

Now let’s consider Sam’s production. He decides to specialize and only make salads, but he knows that he can trade 1 salad for 1 hamburger in the open market. If he has to eat 10 hamburgers, how many salads can he eat with and without trade. Let’s do it graphically.

import matplotlib.pyplot as plt


HamburgersSam2 = []
SaladsSam2 = []

for x in range(0,11):
    HamburgersSam2 += [x*4]
    SaladsSam2 += [(10-x)*4]

plt.plot(HamburgersSam,SaladsSam)
plt.plot(HamburgersSam2,SaladsSam2)

plt.xlabel("Hamburgers")
plt.ylabel("Salads")
plt.plot(10,20,'ro')
plt.plot(10,30,'go')
plt.show()

The only new element of this graph is plt.plot(10,20,’ro’) and plt.plot(10,30,’go’). These functions plot points at (10,20) and (10,30). The ‘ro’ and ‘go’ tells matplotlib to plot them as red (hence the r) and green (hence the g) points. Trade has effectively increased the number of salads Sam gets by 10 at a level of 10 hamburgers.

An important concept for economics is advantage. Absolute advantage refers to the ability to make a product more efficiently than another party. Sam has absolute advantage with salads, where as Hank has it for hamburgers. Comparative advantages refer to the advantage of sacrificing less of the other thing when you make something. So for Sam, when he makes 4 salads he gives up 2 hamburgers, thus for every salad he gives up half a hamburger. For Hank it’s the opposite, for every hamburger he gives up half a salad. A person can be absolutely better at producing both products, but each person will have a comparative advantage in one.

An example of this is person A can make 1 hamburger or 1 salad and person B can make 100 hamburgers or 10 salads. Person B has absolute advantage in both, but for comparative advantage what does each give up? Person A gives up 1 hamburger per salad or 1 salad per hamburger. Person A gives up 10 hamburgers per salad, or .1 salads per hamburger. Thus Person A has the comparative advantage for producing salads since they only give up 1 hamburger where as Person B gives up 10. Comparative advantage is what drives specialization, even if one person is completely better at both, it makes sense to specialize and allow for each to do what they’re best at.

Source Code