Economics X Creativity

Multimedia Case 2: VIPs from Three Kingdom

Case Study prepared by:

Prof. Michael FUNG

Dr. Fred KU

Dr. David CHOW

Mr. Sam KONG

Miss Cindy LAU

Mr. Patrick CHEUNG

Video produced by: Heep Yunn School (2012)

* Should you have any comment, please email Prof. Fung ()

Introduction

Three ancient imperial guards Liu Bei (劉鼻), Guan Mao (關毛) and Zhuzai Liang (豬仔亮) were suddenly channeled to modern Hong Kong. There they met two students, So and Fok. So and Fok asked the imperial guards to steal the confiscated mobile phone from Ms Tam. Liu and her friends in turn requested So and Fok to send them back to the ancient time. In search of the phone and the path to the imperial past, the two teams encountered different problems and challenges. Would they accomplish their missions?

The story theme is refreshing, with plenty examples to illustrate the advantages of division of labour. The video also mentions the mutual benefit of exchange and the underlying concept of comparative advantage.

Key Question

How does specialisation benefit our daily life?

Key Concepts

  1. Specialisation exchange
  2. Division of labour
  3. Benefits of division of labour
  4. Comparative advantage

Learning Outcomes

Understand the benefits of division of labour and the rationale behind specialisationand exchange.

P. 1

True / False Questions

1. / It takes Fred 3 hours to make an apple pie and 4 hours to make a shirt. Franko needs 2 hours for anapple pie and 5 hours for a shirt. In order to trade with each other, Fred should specialise in making shirts and Franko should specialise in making pies.
2. / If international trade is possible, it is likely for an economy to specialize in producing the goods in which it has comparative advantage.
3. / Specialisation and trade allow countries to consume beyond the amount of goods they produce under autarky.
4. / The producer with a lower opportunity cost of producing a good is said to have an absolute advantage in producing that good.
5. / Division of labour can increase total productivity and reduce interdependence among different parties.
6. / One of the advantages of division of labour is that individuals at different levels of ability can concentrate on the kind of work for which they are best suited.
7. / If it takes Hong Kong workers fewer hours to produce every good than it takes workers from the mainland, Hong Kong cannot gain from trade with the mainland.
8. / Mass production can take place under specialization.
9. / Two countries can achieve gains from trading with each other even if one country has an absolute advantage in producing all goods.
10. / Under division of labour, each worker only needs the tools for a particular task so some capital goods can be saved.

MC Questions

  1. Suppose Country A specialises in producing food while Country B specialises in producing clothing. What kind of division of labour is it?

A)Simple division of labour

B)Complex division of labour

C)Regional division of labour

D)None of the above.

  1. Generally speaking, if two countries specialise in producing the goods they have a(an) ______and trade with each other, the total output would increase.

(i) absolute advantage

(ii) comparative advantage

(iii) absolute and comparative advantage

A) (i) only

B) (ii) only

C) (iii) only

D) None of the above

3.Exchange leads to

A)less specialisation of labour and other factors of production.

B)lower total output.

C)societies without any specialisation of labour.

D)greater specialisation of labour and other factors of production.

  1. Which of the following statements about comparative advantage is INCORRECT?

A)The principle of comparative advantage applies to nations as well as individuals.

B)When a country has a comparative advantage in producing a good, there are potential benefits of trade.

C)Comparative advantage is determined by the amount of resources used by a person or a group of people to produce a given quantity of a good.

D)A country may have a comparative advantage in producing a good, although it lacks an absolute advantage in producing that good.

  1. Suppose two individuals are involved in two production activities. In which of the following circumstances would neither one has a comparative advantage in production?

A)One individual can finish both activities faster than the other individual.

B)One individual produces more than the other given the same amount of time.

C)The two individuals have the same opportunity cost over the two productions.

D)None of the above, because one of these two individuals will always have a comparative advantage in one of the production activities.

  1. The producer that uses fewer resources to produce a certain amount of a good compared with other producers

A)should specialise in producing that good.

B)has a comparative advantage in the production of that good.

C)has an absolute advantage in the production of that good.

D)has an absolute advantage and a comparative advantage in the production of that good.

  1. In the video, in order to help the three ancient people back to the past, the students have to search via the internet and a newspaper. If division of labour is employed,

A)two tablet computers and two newspapers are needed.

B)the time used to find the way out will be much longer.

C)only one tablet computer and a newspaper is needed.

D)capitallabour ratio increases.

  1. Which of the following statements regarding division of labour is FALSE?

A)Complex division of labour means each person specialises in a sub-process of the production of a good or service.

B)Since every worker specialises in one type of work, he or she may find it difficult to find another job in case of unemployment.

C)Training cost of workers is reduced.

D)None of the above

  1. Under division of labour, the one with the ______opportunity cost for performing a particular task (which means he has a/an ______) will specialise in that task. As a result, total productivity will ______.

A)lowest; comparative advantage; increase

B)lowest; absolute advantage; increase

C)highest; comparative advantage; increase

D)highest; absolute advantage; decrease

  1. Which of the following statements is NOT a disadvantage of division of labour?

A)Standardization of products may result, hence fewer choices for consumers.

B)The risk of unemployment for workers will be lower as each individual is talented in a particular task.

C)Monotony in work may reduce productivity.

D)Due to a high degree of interdependence, any failure in one process of production may cause problem to the entire one.

Discussion Questions

  1. In order to find a way to travel back in time, one student is doing an internet search while the other one is checking up the newspaper.

(a)What are the advantages of division of labour in this example?

(b)Are there anypossible disadvantages of division of labour? Name one and explain.

  1. Regional division of labour refers to the specialisation in production of goods or services by different countries or regions. Hong Kong imports different goods (e.g. food and consumer goods) from the mainlandand exports trading and financial services to the mainland.

Contribution to HK’s GDP[1](%) by economic activities

2006 / 2010
Agriculture, fishing, mining and quarrying / 0.1 / 0.1
Manufacturing / 1.8 / 1.8
Electricity, gas and water supply, and waste management / 2.3 / 2.0
Construction / 3.2 / 3.3
Services / 92.6 / 92.9

Source: Census and Statistics Department, HKSAR

(a)From the above table, what percentage did the primary sector (agriculture, fishing, mining and quarrying) contribute to Hong Kong’s GDP in 2010?

(b)As mentioned in this question, instead of producing food and consumer goods on its own, Hong Kong import them from the mainland. Why is there such a trading pattern? What comparative advantage does Hong Kong have?

(c)Explain with the concept of opportunity cost why Hong Kong does not specialise in the agricultural industry.

(d)If Hong Kong does not engage in international trade, how would this affect the price of Hong Kong’s agricultural products? Explain your answer.

  1. Guan Mo and his friend, Zhang Fei, produce food and clothes. The following table shows the outputthat they can produce using the same amount of resources:

Food / Clothes
Guan Mo / 4 units / 6 units
Zhang Fei / 3 units / 2 units

(a)Generally speaking, under what conditions will exchange between two parties be possible?

(b)Who has an absolute advantage in producing food and clothes respectively?

(c)Who has a comparative advantage in producing food and clothes respectively?

(d)If they trade, who will specialise in what task? Explain briefly.

(e)Assume trade is possible between them. Suggest a possible price range of food in terms of clothes.

(f)Suppose Guan Mo has absolute advantages in producing both food and clothes, he may also be able to benefit from trade. Suppose the unit price for food is one (unit of clothes), show how trade would benefit him.

  1. In school, students have many team projects. There will be a more capable student in a team but he or she usually does not attempt to finish the whole project on his or her own, even though by doing so may result in a better grade. Suggest why.

Challenging Question

  1. Many students receive private tutorials in Hong Kong. It is common for a tutor to cover all subjects for primary and junior secondary school students. Yet for senior secondary school students, a tutor typically covers only one specific subject. Why is the difference? (Hint: think about opportunity cost and specialisation.)

Suggested Answers

True / False Questions:

1. T2. T3. T4. F5. F6. T7. F8. T9. T10. T

MC Questions:

1. C2. B3. D4. C5. C6. C7. C8. D9. A10. B

Discussion Questions:

(a)The one who has comparative advantage in a particular task can concentrate on that task. Productivity increases and the time needed to finish the tasks canbe shortened.In addition, division of labour allows them to save some capital goods too.

(b)The major problem is the monotony from work. If the problem is serious, productivity may be negatively affected.

(a)0.1%

(b)The trading pattern depends on the comparative advantages of different regions. In other words, the one with lower opportunity cost will perform a particular task. Hong Kong specialises in producing different kinds of services, because she is (1) a well-established international financial centre which is well-connected to the rest of the world with extensive transportation network, and (2) able to attract talents around the world. These contribute to the comparative advantage of Hong Kong in the production of trading and financial services.

(c)Agriculture is a land intensive industry, yetland is very limited in Hong Kong. If Hong Kong was to specialise in agricultural industry, much land of high rental value, including Tsim Sha Tsui, Central, etc., would have to be changed into agricultural use. However, these areas can be used for higher value-added production like the service industry. The cost of growing agricultural products will be high, resulting in a high price for these products. Importing from other regions (e.g. the mainland) will be a less costly way.

(d)If Hong Kong does not engage in international trade, Hong Kong has to produce agricultural products itself. Therefore, as mentioned in (c), we expect higher prices for agricultural products.

(a)Exchange may happen if there exists a difference in the opportunity costs of production between two parties. At the same time, double coincidence of wants should be satisfied, and transaction cost is negligible.

(b)Guan Mo. He can produce more food and clothes given the same amount of resource.

(c)Food: Zhang Fei. Zhang’s opportunity cost of producing 1 unit of food is 2/3 unit of clothes, while that of Guan’s is 1.5 clothes.

Clothes: Guan Mo. Guan’s opportunity cost of producing 1 unit of clothes is 4/6=2/3 unit of food, while that of Zhang is 1.5 units of food.

(d)From (c), Zhang Fei will specialise in food production while Guam Mo will specialise in clothes production.

(e)The opportunity cost of producing a unit of food for Zhang Fei is 2/3 unit of clothes, while that for Guan Mo is 1.5 units of clothes. Thus, the price range of a unit of food in terms of clothes is: 2/3 < p < 1.5.

(f)Although Guan Mo has the absolute advantage in both tasks, he can still benefit by specialisation and trade. It costs him 1.5 units of clothes to produce a unit of food when there is no trade, while the cost may drop to 1 unit of clothes when there is trade. Essentially, trade offers him a less costly way to consume food.

A student may have absolute advantage in doing all parts of the project. However, if he or she tries to finish all parts, it will be too costly (in terms of time, for example). In other words, he or she does not have comparative advantage in performing all tasks. To be efficient, task assignment should be based on members’ comparative advantages, and thus even a more capable student should not take up all tasks.

Since the curriculum of primary school and junior secondary school is rather elementary, a private tutor is able to cover all subjects with relative ease. However, the materials in senior secondary school are more diverse and advanced. It requires more preparation time fromthetutor. It is practically impossible for one to prepare all subjects.

Instead of teaching severalsubjects, it is beneficial for a tutor to specialise in one subject and offer tutorial service to multiple students. Byso doing the preparation time per student can be shortenedand tutors can earn a higher income.

P. 1

[1] Computed by basic price, which refers to the price for a good or service, less any sales tax or value-added tax the buyer pays and plus any subsidy the seller receives. In other words, the basic price is what the seller collects for the sale, as opposed to what the buyer pays.