Trade and Comparative Advantage

… a core concept in Economic Analysis and Atlas102

Click for MRU video

Click for MRU video

Concept description

Alex Tabarrok (reference below, video on right) describes how trade increases productivity through specialization according to comparative advantage.

This is one of the three benefits of trade:

  1. Trade makes people better off when preferences differ
  2. Trade increases productivity through specialization (see Division of Labour) and the Division of Knowledge
  3. Trade increases productivity through specialization according to Comparative Advantage

Tabarrok explains why Absolute Advantage is not relevant in determining what should be traded to make both parties better off, using the example of whether it makes sense for Martha Stewart to iron her own shirts. The key is Opportunity Cost.

He uses the same logic to explain how the U.S. and Mexico both benefit from the U.S. buying shirts from Mexico and Mexico buying computers from the U.S.

Tabarrok concludes with by noting that comparative advantage applies to people, groups or countries and this is sometimes known as the Law of Association. He sees this as an optimistic theory, which essentially that everyone can gain from trade – by working together we can increase total wealth. It is trade that converts diversity into strength.

MarthaStewart

MexicoUSTrade

DiversityIsStrength

Practice questions

From http://www.mruniversity.com/node/201830, accessed 5 May 2016.

  1. What is a source of comparative advantage?

Atlas topic, subject, and course

Trade (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Alex Tabarrok, Another Look at Comparative Advantage (12-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-definition-opportunity-cost, accessed 5 May 2016.

Page created by: Ian Clark, last modified 5 May 2016.

Image: Alex Tabarrok, minute 0.14 of Another Look at Comparative Advantage (12-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-definition-opportunity-cost, accessed 5 May 2016.