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Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual

CHAPTER 2
SPECIALIZATION AND EXCHANGE
Chapter Overview

Specialization and trade can make everyone better off. It is not surprising, then, that in an
economy driven by individuals seeking to make a profit or to make the biggest difference in
their communities, people specialize so as to exploit their comparative advantages. The
principle is as true for countries, like Canada and China, as it is for individuals picking their
careers. No government intervention is required to coordinate production. The great economic
thinker Adam Smith suggested the term invisible hand to describe this coordinating mechanism:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our
dinner, but from their regard to their [self-interest]. . . . he intends only his own gain, and he is in
this, as in many other cases, led by an invisible hand to promote an end which was no part of his
intention. (A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.)

The functioning of the invisible hand depends on a lot of other assumptions, such as free
competition, full information, and many others that do not always hold true in the real
world. Later in the book we will discuss these assumptions, and when they work and when
they do not.

Most people take for granted the prevalence of specialization and trade in their everyday lives.
Few stop to think about the benefits and where they come from. In this chapter we tried to dig
down to the bottom of the assumptions people make and expose the logic behind the gains
from trade. As we proceed—especially when we return to topics like international trade and
government intervention in the markets—students must remember the underlying incentive
that drives people to interact with one another in economic exchanges.
Learning Objectives

LO 2.1: Construct a production possibilities graph and describe what causes shifts in production
possibilities curves.
LO 2.2: Define absolute and comparative advantage.
LO 2.3: Define specialization and explain why people specialize.
LO 2.4: Explain how the gains from trade follow from comparative advantage.

Karlan 1CE Instructor’s Manual: Chapter 2 Copyright © 2017

McGraw-Hill Education. All rights reserved . 2-1
 Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual

Chapter Outline

OPENING STORY: THE ORIGINS OF A T-SHIRT

Production Possibilities
Drawing the Production Possibilities Frontier (LO 2.1)
Choosing Among Production Possibilities
Shifting the Production Possibilities Frontier
Absolute and Comparative Advantage
Absolute Advantage (LO 2.2)
Comparative Advantage
BOX FEATURE: FROM ANOTHER ANGLE – BABE RUTH, STAR PITCHER
Why Trade?
Specialization (LO 2.3)
BOX FEATURE: REAL LIFE – SPECIALIZATION SAUCE
Gains from Trade (LO 2.4)
BOX FEATURE: WHAT DO YOU THINK? – IS SELF-SUFFICIENCY A VIRTUE?
Comparative Advantage over Time
BOX FEATURE: REAL LIFE – COMPARATIVE ADVANTAGE: THE GOOD, THE BAD, AND THE
UGLY

Beyond the Lecture

Class Discussion: Production Possibilities (LO 2.1)

In order to highlight the concept of the production possibilities curve, have students
consider the production possibilities curve for a student deciding how to study for two
exams given a fixed timeframe. This helps to highlight the concept of tradeoffs for students,
as you can ask them to consider the tradeoff between grades on the two exams. Assume
that the students have a fixed number of hours in one evening to study for two large exams
the following day.
1. What tradeoffs does a student face when deciding how to spend his or her time?
2. What factors should the student consider when making the decision regarding how to
study?
3. Why might different students make different decisions regarding how to spend the
hours studying?

Class Discussion: Absolute and Comparative Advantage (LO 2.2)

Have students view a brief clip from the movie Tommy Boy to highlight comparative
advantage, specifically from 52:26 – 55:43 (or a little longer if you prefer). In the clip, Tommy
(Chris Farley) and Richard (David Spade) realize their relative strengths: Tommy is a people
person and Richard is good with numbers.

Karlan 1CE Instructor’s Manual: Chapter 2 Copyright © 2017

McGraw-Hill Education. All rights reserved . 2-2
 Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual

1. What are Tommy’s skills relative to Richard’s?

2. How could they utilize their relative strengths? Do they do this in the movie?
3. How do people try to leverage their comparative advantage in reality?

Writing Assignment: Specialization (LO 2.3)

Have students read (or listen to the audio book for) I, Pencil by Leonard E. Read. Ask students to
write a brief essay on why no single individual can personally produce even a seemingly simple
product like a pencil.

Class Activity: Gains from Trade (LO 2.4)

A simple trading exercise can highlight the concept of gains from trade for students. Bring a
few bags of chips or other snacks to class and distribute them to students (you may choose
only a few students for this activity in a large lecture).

1. Ask each student to rate their satisfaction with the snack you’ve given them on a
scale from 1-10, with 1 being highly dissatisfied and ten being highly satisfied. Record
their answers somewhere where all students can see.
2. Ask the students if they want to trade, and give them a few minutes to interact and
exchange snacks. (Remind them that it must be voluntary—they do not have to trade if
they do not wish to.)
3. Ask the students about their satisfaction again, this time with their new snack. Have the
students explain any changes in their answer from before.

After trading, students should be at the very least equally as well off in terms of satisfaction as
the first time they answered. This exercise can be used to highlight the gains from trade. You
can also discuss the fact that the original distribution matters as well. This can tie into a number
of discussions, including income distribution and comparative advantage.

Solutions to End-of-Chapter Questions and Problems

Review Questions

1. You’ve been put in charge of a bake sale for a local charity, at which you are planning to sell
cookies and cupcakes. What would a production possibilities graph of this situation show?
[LO 2.1]

Answer: On one axis, the production possibilities graph would show the total number of
cookies you could bake if you spent all of your time and resources baking cookies. The other
axis would show the total amount of cupcakes you could bake if you spent all of your time
and resources baking cupcakes. The two endpoints would be connected by a downward-
sloping line. The slope of this line would represent the tradeoff (opportunity cost) you face
between baking cookies and baking cupcakes. If you bake more cupcakes, you must bake
Karlan 1CE Instructor’s Manual: Chapter 2 Copyright © 2017
McGraw-Hill Education. All rights reserved. 2-3
 Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual

fewer cookies. The production possibilities graph would show all of the combinations of
cookies and cupcakes you could produce with your time and resources.

2. You manage two employees at a pet salon. Your employees perform two tasks: giving flea
baths and grooming animals. If you constructed a single production possibilities frontier for
flea baths and grooming that combined both of your employees, would you expect the
production possibilities frontier to be linear (a straight line)? Explain why or why not. [LO
2.1]

Answer: You would not expect a production possibilities frontier that combined both
of your employees to be linear. Each worker would likely differ in her relative skills at
grooming and giving flea baths and would therefore differ in the opportunity cost for
performing each task.

3. Back at the bake sale (see review question 1), suppose another volunteer is going to help you
bake. What would it mean for one of you to have an absolute advantage at baking cookies or
cupcakes? Could one of you have an absolute advantage at baking both items?
[LO 2.2]

Answer: If you have an absolute advantage in the production of cupcakes (or cookies) it
means that you can produce more cupcakes (or cookies) in total with the same amount of
resources than the other volunteer. Absolute advantage is about having greater
productivity. You could have an absolute advantage in baking both cupcakes and cookies
if you are more productive in both goods than the other volunteer.

4. What would it mean for you or the other volunteer to have a comparative advantage at
baking cookies or cupcakes? Could one of you have a comparative advantage at baking
both items? [LO 2.2]

Answer: If you had a comparative advantage in baking cookies, it would mean that you have
a lower opportunity cost (you give up fewer cupcakes for each cookie you bake) than the
other volunteer. It is not possible for you to have a comparative advantage in baking both
goods. If you have a comparative advantage in baking cookies, the other volunteer will have
a comparative advantage in baking cupcakes.

5. Suppose you have a comparative advantage at baking cookies, and the other volunteer has a
comparative advantage at baking cupcakes. Make a proposal to the volunteer about how to split
up the baking. Explain how you can both gain from specializing, and why. [LO 2.3]

Answer: If you have a comparative advantage in baking cookies and the other volunteer has a
comparative advantage in baking cupcakes, then you should specialize in baking cookies and
the other volunteer should specialize in baking cupcakes. If you spend all of your time
Karlan 1CE Instructor’s Manual: Chapter 2 Copyright © 2017
McGraw-Hill Education. All rights reserved. 2-4
Another document from Scribd.com that is
random and unrelated content:
KUUDESYHDEKSÄTTÄ LUKU.

Uskollisen rakkauden palkinto.

Samana yönä, jolloin Serbian Aleksanteri ja Draga niin hirmuisella

tavalla murhattiin, otettiin hengiltä myöskin Nicodem Lunjevica, yksi
aikansa hirmuisimpia ilmiöitä.

Hän luuli sinä yönä saavansa levätä Saroltan sylissä. Sarolta ottikin
hänet vastaan hurmaavassa puvussa. Hän heittäytyi Nicodemin syliin ja
suuteli häntä hellästi. Mutta tuskin he olivat ehtineet hyväillä toisiansa,
kun talon portti äkkiä jyrisi ja kun ei se heti avautunut, lyötiin portti
sisään ja salaliittolaiset tunkeutuivat sisälle. Nicodem haki revolverinsa,
mutta hänelle ei annettu aikaa sitä käyttää. Ennenkuin hän ehti siihen
tarttua oli jo hyökätty hänen päällensä ja hänet vangittu.

- Kurjat, mitä uskallatte tehdä, oletteko tulleet mielettömiksi? Enkö

minä ole kuningattaren veli, enkö minä ole vallanperijä? huusi Nicodem.

- Nyt ei ole enää kuningatarta, sisaresi makaa murskattuna kadulla

konakin ulkopuolella lankosi rinnalla. Kuningas ja kuningatar ovat
molemmat kuolleet!

Silloin tiesi Nicodem, että hänen viimeinen hetkensä oli tullut ja

meidän täytyy rehellisesti myöntää, ettei hän suinkaan pelkurimaisesti
mennyt kuolemaan. Tyyneenä ja vastarintaa tekemättä antoi hän viedä
itsensä ulos kadulle, asettui lyhtypylvään viereen ja huudahti:
 - Ampukaa sitte, koirat, mutta tähdätkää ainakin varmasti. Näytelmä
on loppunut, se oli todellakin kappale, joka huvitti minua suuresti. Nyt
jälestäpäin maksan minä pääsymaksun.

Samassa kiväärit pamahtivat ja Lunjevica vaipui kuolleena maahan.

Mutta vielä on eräs henkilö, joka sinä yönä sai surmansa. Se oli
arvoisa täti Eufemia. Melun säikyttämänä harhaili hän ympäriinsä
konakissa. Hän päätti vihdoin pelastua erään takaportaan kautta. Mutta
hädissään astui hän harhaan ja syöksyi päälleen alas portaita.

Niska musertui ja hän jäi makaamaan aliselle portaalle. Hänkin oli

saanut rangaistuksensa.

*****

Mutta pois nämä synkät kuvat, pois Belgradin veriyön muistot.

Nyt on Serbia Pietari Karageorgevitschissa saanut oikeamielisen

kuninkaan, joka kykenee parantamaan ne monet haavat, jotka Draga on
maalle tuottanut, edellyttäen, että hän saa rauhassa sitä tehdä. Hän on
eroittanut virastaan kuningas Aleksanterin murhaajat, tosin vasta sitte
kun eurooppalaiset vallat hänet siihen pakoittivat.

Yksi onnellinen pari löytyy sentään Serbiassa, nimittäin Stefan

Naumovitsch ja hänen Geniansa. He olivat vihdoin löytäneet toisensa ja
olivat yhdistetyt molemminpuolisessa rakkaudessa. He asuvat kauniissa
Wienissä, samassa talossa, joka kuului Genian vanhemmille ja jonka nyt
Genia omistaa.

Jos kävelee Wienin Praternissa, niin voi kauniina päivinä kello 3:men
ja 5:den välillä nähdä kauniit ajoneuvot, joissa istuu nuori pari, joka
herättää huomiota kauneudellaan ja terävä katsoja voi heti huomata, että
siinä on kaksi onnellista ihmistä.
 Ne ovat Stefan Naumovitsch ja Genia, jotka ovat kunnioitetut ja
suositut Wienin parhaissa piireissä. Sillä heidän elämäntarinansa
tunnetaan ja tiedetään, että Serbian pahahenki on raivoissaan heitäkin
vainonnut, mutta että he eivät langenneet Dragan uhriksi, sillä Jumala
suojeli heitä uskollisen rakkautensa tähden.

Loppu.
*** END OF THE PROJECT GUTENBERG EBOOK KUNINGATAR
DRAGAN RAKKAUSSEIKKAILUT JA KUNINGAS
ALEKSANTERIN ONNETON KOHTALO ***

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