Some weeks back, I was teaching at a session for IB HL Economics, a typical numerical proof for how the theory of comparative advantage can confer mutual benefits between 2 trading parties.
A key requirement to achieving that lies in the terms-of-trade lying in-between the respective countries’ opportunity cost in producing one unit of a particular good. You can read more about the proof to this, in my previous piece here.
A very important part to effective learning involves “learning by doing”. But to avoid confusion in having parallel sets of numbers, I typically utilise the textbook’s numerical set-up, but try to find the appropriate trade solution independent of the book.
The book we used, was Oxford IB Diploma Programme: IB Economics Course Book (2020), by Jocelyn Blink and Ian Dorton:
And so we went over the numbers on the relevant example, on Page 358 – 360, starting with the initial production set-up for 2 countries:
Bearing in mind that we will only need to focus on the opportunity cost as calculated for one type of good, the following discussion will reference the 3rd column: Opportunity cost of 1 litre of wine.
At this point, from the reader’s perspective, it is important to know what the given set of quantities represent. Is it:
- The respective quantities of either goods when all resources are utilised in one, or the other (i.e. the x and y-intercepts on the respective countries’ PPC); or
- The respective quantities of both goods when half of each country’s resources are utilised in producing for each type (i.e. the mid-point of the respective countries’ PPC)?
At least that’s how the usual set-up goes for ease of determining the resource endowment of both countries, in addition to the relative (opportunity) cost in producing either type of goods.
Not so for this book thought, which explained that the quantities are based on “the production outcomes where two countries, France and Poland, are using the same quantities of resources to produce wine and cheese”.
Now, if my competency in English serves, this means that the given set of numbers illustrate a hypothetical situation where the respective outputs are achieved based on utilising the same given resource endowment level for both countries?
That’s not exactly the most realistic portrayal of both country’s production characteristics per se, but we can perhaps reconcile it with the supposed purpose of its existence, which was to show that “France has an absolute advantage in the production of both goods”.
In that context, we can use some imagination and recognise that the authors were trying to say that France is simply more efficient than Poland and able to produce more, assuming both countries have the same resource endowment.
But wait, did that make sense? Was the question of resource endowment concretely answered?
At this point, I gave up. Absolute advantage isn’t exactly our focus here anyway. But I would add that a textbook that requires any use of imagination and logical gymnastics in its tedium of explanations, should probably be reclassified as a novel.
Sadly, more confusion was in store for us.
Remember what I had mentioned about the need for the terms-of-trade to lie in-between the respective countries’ opportunity cost in producing one unit of a particular good, for mutual benefits to be possible?
Returning again to the given production set-up for both countries, we can derive the mutually beneficial terms-of-trade to be: 1 wine for x cheese, where 4/3 < x < 3
Just imagine my confusion, while teaching, when the textbook proposed a 1:1 trade terms, which was a clear violation of that rule:
But for the sake of seeing where this rabbit-hole could lead us to, we carried on with utilising that same production schedule table:
Next, the book stated that a trade of 600 cheese (from Poland), against 600 wine (from France) takes place, and the end-result indeed proved the authors’ point of mutual benefits (i.e. the growth in respective consumption points):
This was surely not what I would have expected.
Looking closely again at Table 23.2, and comparing against Table 23.3 yielded the reason behind the contradiction:
The relative opportunity costs for France had somehow differed across both sets of numbers (1 wine for 4/3 cheese in the earlier Table 23.2, vs 1 wine for 3/4 cheese in Table 23.3).
Was this an honest mistake on the coursebook’s part?
In any case though, giving a false impression that just any arbitrary terms-of-trade works for mutual benefits between trading partners is a big no-no.
Next steps as a responsible tutor?
The immediate aftermath of using the book as part of teaching materials was significant confusion for myself and my student.
Post-lesson, I slept on it a little while, before deciding that I could do my bit by letting the publisher (Oxford University Press) know over a web form for enquires, about what appeared to be an authors’ boo-boo:
Hi! I refer to the book, Economics Textbook – Joceyln Blink & Ian Dorton (2020), pages 358-360.
Given the opportunity costs stated in Table 23.2, it shouldn’t be possible for a Terms-of-Trade of 1:1 to work. Yet, the ensuing analysis “proved” that so, using Table 23.3, which was supposedly derived from 23.2.
On closer examination, it is apparent that the opportunity cost ratio for France in Table 23.3 had been flipped (3/4 cheese to 1 wine, vs 4/3 cheese to 1 wine in Table 23.2).
This is a significant error that fails to recognise that only Terms-of-Trade that lie between the respective opportunity costs for a given good will allow for mutual benefits when trading.
I would suggest appropriate corrective action on the content to set the record straight to avoid confusion for students.
Straight-to-the-point without sounding rude? On my part, it felt a little like the classic scene where Moss from the IT Crowd, wrote his email to the fire department for help:
In the event, the feedback was submitted to Oxford University Press more than 2 weeks ago, and I hadn’t heard back since.
I made what could probably be described as a paltry attempt, in finding the authors’ email (Jocelyn Blink, Ian Dorton), which (surprise, surprise) turned no leads up.
So then this piece was written by me, to serve as an unofficial PSA of sorts, especially for IB Economics students who might be utilising Oxford IB Diploma Programme: IB Economics Course Book (2020) as their primary coursebook.
Textbooks can be wrong, and being able to recognise discrepancies when you encounter them is highly imperative.