Comparative advantage explains why individuals and countries trade with each other. Trade is at the heart of modern economies: individuals specialize in production and generalize in consumption. To consume many goods while producing relatively few, individuals must sell what they produce in exchange for the output of others. Countries likewise specialize in certain goods and services and import others. By so doing, they obtain gains from trade. Show shows the productivity of two different countries in the production of two different goods. It shows the number of labor hours required to produce two goods—tomatoes and beer—in two countries: Guatemala and Mexico. From these data, Mexico has an absolute advantage in the production of both goods. Workers in Mexico are more productive at producing both tomatoes and beer in comparison to workers in Guatemala. Table 16.4 Hours of Labor Required Tomatoes (1 Kilogram)Beer (1 Liter)Guatemala63Mexico22In Guatemala, the opportunity cost of 1 kilogram of tomatoes is 2 liters of beer. To produce an extra kilogram of tomatoes in Guatemala, 6 hours of labor time must be taken away from beer production; 6 hours of labor time is the equivalent of 2 liters of beer. In Mexico, the opportunity cost of 1 kilogram of tomatoes is 1 liter of beer. Thus the opportunity cost of producing tomatoes is lower in Mexico than in Guatemala. This means that Mexico has a comparative advantage in the production of tomatoes. By a similar logic, Guatemala has a comparative advantage in the production of beer. Guatemala and Mexico can have higher levels of consumption of both beer and tomatoes if they trade rather than produce in isolation; each country should specialize (either partially or completely) in the good in which it has a comparative advantage. It is never efficient to have both countries produce both goods. If you do everything better than anyone else, should you be self-sufficient and do everything yourself? Self-sufficiency is one possibility, but it turns out you can do better and make others better off in the process. By instead concentrating on the things you do the “most best” and exchanging or trading any excess of those things with someone else for the things that person does the “most best,” you can both be better off. Comparative advantage fleshes out what is meant by “most best.” It is one of the key principles of economics. Comparative advantage is a powerful tool for understanding how we choose jobs in which to specialize, as well as which goods a whole country produces for export. Can one country produce everything so cheaply that other countries have no production options and no work opportunities for their citizens? Do large countries—which can produce more of everything—take unfair advantage of small countries when they trade? Before reading about comparative advantage, you should review Exchange and Trade. After reading about comparative advantage, you may want to read about the Division of Labor and Specialization, about Globalization, Interdependence, and Local Trade, about Economic Growth, and about Barriers to Trade. Definitions and BasicsComparative Advantage. On Econlib:
Comparative Advantage, by Donald J. Boudreaux. Concise Encyclopedia of Economics
Treasure Island: The Power of Trade. Part I. The Seemingly Simple Story of Comparative Advantage, by Russ Roberts on Econlib
Comparative Advantage, by Dwight Lee. At CommonSenseEconomics.com:
In the News and ExamplesDon Boudreaux on Globalization and Trade Deficits. Podcast on EconTalk.
Trading countries both achieve gains from trade: , by Jane Haldimand Marcet in John Hopkins’s Notions on Political Economy. 1831.
The Worldwide Decline in Conscription: A Victory for Economics?, by Joshua C. Hall.
A Little History: Primary Sources and ReferencesDavid Ricardo’s famous paragraph on comparative advantage (before the term was coined): , by David Ricardo, in On the Principles of Political Economy and Taxation
A Brief History of Comparative Advantage, by Morgan Rose. Teacher’s Corner on Econlib
Part I, Chapter III, The Principle of Comparative Advantage, by Frank William Taussig, from Some Aspects of the Tariff Question
David Ricardo’s contribution: Chapter VIII. Gains From Trade: The Doctrine of Comparative Costs, by Jacob Viner, from Studies in the Theory of International Trade
Advanced ResourcesRoberts on Smith, Ricardo, and Trade. Podcast at EconTalk.
Critiques to Ricardo’s idea of comparative advantage: Ed Leamer on Outsourcing and Globalization. Podcast at EconTalk. Discussion of comparative advantage and critiques starts at time stamp 16:21.
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