Chapter 15 Comparative Advantage and Trade Most people would rather have a job making computer chips rather than potato chips. This may be rational, but the speed with which people state their preference belies a common misconception. | Chapter 15 Comparative Advantage and Trade Most people would rather have a job making computer chips rather than potato chips. This may be rational but the speed with which people state their preference belies a common misconception. In fact the one occupation is not necessarily more profitable than the other. Haitians for example can make more money per hour growing and harvesting peanuts than they could make building computers. Economists use the terms absolute advantage and comparative advantage in discussing such issues. A worker or a country of workers has an absolute advantage in production of a particular good if that worker or country can produce the good using fewer inputs than the competition. For example in producing a good that requires labor only the worker who can make a unit of the good in the least amount of time has an absolute advantage in the production of that good. The United States has an absolute advantage in producing a number of goods since its work force is extremely productive and its economy is very well organized. Guatemala has an absolute advantage in the production of bananas because of the country s climate. Kuwait has an absolute advantage in the production of crude oil since its plentiful reserves make it easier to extract oil. The term comparative advantage dates back to Suppose a worker or a country of workers can make some good a and sell it for pæ dollars per unit on an open market. Obviously the worker would like to sell the good for as high a price pæ as possible. Ifpx is low enough the worker will switch to production of some other good. We say that the worker has a comparative advantage in the production of a if the worker or country will find it profitable to make a at lower pæ than that at which the competition will find it profitable. This will be made quite a bit clearer when we formalize the concept in Section . For now let s think about the production of a particular good the amount you learn in 1Ricardo
