This chapter introduces you to the basis for exchange – comparative advantage. You will learn how to identify comparative advantage, and to calculate the gains from specialization and trade between people and between countries. | Comparative Advantage: The Basis for Trade Slide 3 - What is Chapter 3 about? Slide 3 - I. Introduction to Comparative Advantage Slide 3 - Generalize or Specialize? Generalists People who do all (or most) of their own tasks “Jack-of-all-trades” Problem: “Master of none” Self-sufficiency is the advantage Low productivity is the disadvantage Specialists Focus on fewer tasks & trade to satisfy wants Each person is more productive – hence greater total output Slide 3 - Comparative Advantage Relative costs are the key idea in comparative advantage Example: Farmer Clem has fertile soil, yields 3 tons potatoes or 1 ton carrots per hectare Dan has rocky soil, could produce 2 tons potatoes or ton carrots per hectare Slide 3 - Specialization or self sufficiency ? What is the opportunity cost of producing one ton of carrots ? Clem has to give up 3 tons potatoes Dan has to forgo 4 tons potatoes has to switch 2 Hectares’ production Clem has lower relative costs of carrot . | Comparative Advantage: The Basis for Trade Slide 3 - What is Chapter 3 about? Slide 3 - I. Introduction to Comparative Advantage Slide 3 - Generalize or Specialize? Generalists People who do all (or most) of their own tasks “Jack-of-all-trades” Problem: “Master of none” Self-sufficiency is the advantage Low productivity is the disadvantage Specialists Focus on fewer tasks & trade to satisfy wants Each person is more productive – hence greater total output Slide 3 - Comparative Advantage Relative costs are the key idea in comparative advantage Example: Farmer Clem has fertile soil, yields 3 tons potatoes or 1 ton carrots per hectare Dan has rocky soil, could produce 2 tons potatoes or ton carrots per hectare Slide 3 - Specialization or self sufficiency ? What is the opportunity cost of producing one ton of carrots ? Clem has to give up 3 tons potatoes Dan has to forgo 4 tons potatoes has to switch 2 Hectares’ production Clem has lower relative costs of carrot production – his comparative advantage is in carrots Dan should avoid carrots – will get most income if specializes in potatoes (but still lower than Clem) Slide 3 - Absolute vs. Comparative Advantage A person has an absolute advantage in a task over someone else if That person takes fewer hours to perform a task than the other person A person has a comparative advantage in a task over another if That person’s own opportunity cost of performing the task is lower than the other person’s opportunity cost Slide 3 - Principle of Comparative Advantage When each producer concentrates on the activities for which opportunity cost is lowest, aggregate output is maximized This holds even when one has absolute advantage over others at everything. Specialization where there is comparative advantage is still the best route! When we all focus where we are relatively more productive, together we can produce vastly more than if we insisted on self-sufficiency. Slide 3 - Table The Gains .
