Comparativeadvantageis definedas the abilit'' to
perform a task at a lower opportunity cost than some
one elseis ableto perform that task. Opportunity cost,
is the
of wharyou gjveup
1ouwill remember,
"alue
to do something.As a producer,you have an absolute advantageif the time and labor required for you
to produce something is lessthan it is for another
producer.But you have: compararv.adrantageif
Iour opportunitycost is lessthan another producer's
opportuniq. cosl,Ricardo'sbreakthroughwas to se."
that, regardlessofabsoluteadvantage,peoplecould
bengfitfrom specializingin thoseactivities in which
they had a comparativeadvantage.
Ricardo developedthis principle in responseto
new Engiish import tariffs known as Com Laws.
Thesetariffs placeda tax on imported grain in order
to raiseits price and protectEnglish grain growers,
who could nol competewilh cheaperforeigngrain.
This tariffhelped farmers and \,/ealthy landowners.
But it hurt factoryworkers,who could not grow
their own food and hnd to pay more for theirbread.
Ricardo argued that allowing cheapgrain to enter
I 4.3HowDoPeople
andNations
GainfiomSpecialization
andTrade?
Remember
AlexanderSelkirk?He wasthe castaway
you readaboutin Chapter2 who wasstrandedon a
desertislandin the early1700s.
Because
Selkirkwas
aloneand had no contaciwith the outsideworld,
hehad no chanceto improvehis standardofliving
throughtrade.
Suppose,howeve! that a secondcastaway,Pirate
Jack,washedup on the islandooe day.Now Selkirk
would not only havesomeone
to talkto; hewould
alsohavea potentialftading partner.But would ttade
makelife better for either Selkirk or PirateJack?
To find oot, considerthe following scenario.
TheCastaways'Dilemrna:
Self-SuIfi
ciercy
or Interdspendence
ShortlyafterPirateJack'sarrival,Selkirktellshim
aboutthe islands two main economicaclivities:
gatheringwild tornipsanddiggingclams.Right
4way,the castawalsfacea cilical question:would
theybe betteroff workingsepamtely
aDdfendiogfor
themselves
orjoining forcesandwoikingtogether?
As it turns out, PirateJackis a moreefficientwork
er thar Selkirk.He is younger,stronger,andbetter
ai almosteverything,includinggatheringturnips
anddiggingdams.As a result,heenjoysan absolule
advantage
in foodproduction.
Figure4.3A showshow manyturnips and clams
eachcastawayis ableto collectin a givenamountof
time.Selkirkcangather10turnipsor dig l0 dams
in onehour,for a totalof40 turnipsor 40 clamsin a
four-hourworkday.PirateIack.an gather30turnips
oi dig 15clamsin anhour In four hours,hecancoilect120turnipsor 60clams.
A! first, the two mende€ideto work togetherand
equallysharethe foodtheyproduce.
PimteIacksoon
beginsto wond€r howevervrhelherhemight b€better
off movingto the othersideof the islandandwork
ing forhimself Basedon his absolute
advantage
asa
food producet he concludesthat it is in his interest
to goit alone.At the time,threecenturiesago,most
peoplewouldha\'eagreedwith PirateJacktdecision.
WhatPirateJack Missed:
TheBe[efitsol Comparalive
Advantage
A centurylater,however,neweconomicinsightsmight
haveled PirateJackto a differentconclusion.
Those
,* oioneerins
workofrher"nsljsh
11
.!1'*i.l:l
e.oromisr
DayidRrcrrdo,
who.In lgtT de\etoped
rhe
rneory ot compararrveadvantage.
England would force the English to cut back on grain
productjondnd Io rnsteadconcentratetheir resources
on manufactu ng, which was increasingly where their
a&"ntage l4a In otler words, English producrrs should
specializein goods in which they had a comparative
advantageard then trade with foreign producers. The
results,Ricardo said, would benefit society as a whole-
Calculating
theopporlunity
Costsot GoingltAlone
Theproduction
possibilities
frontiers(PPFS)
in
I
Figure4.38showhow Ricardottheorycan beap
pliedto Selkirkand Pi.atelack. Remember
that a
PPFshowshowmuch of two productsor services
a Personor an economycanProducein a given
amountof time.
Selki*t PPFshowsthat he can produce40 tur
nipsor 40clamsin fourhours.lfhe divideshis time
betweenthe two activiti€s,hecan producea combina'
tion ofturnips and clamsin varying amount$.lor example,Point,4 on the graphindicatesthat Selkirkcan
collect20turnipsand20 clamsin a typicalworkday.
According to PimteJackt PPF,in addition to his
daily rateof 120turnipsor60 clams,he canproduce
mixedquantities,suchas90turnipsand 15clams.
This mixedquantityis represented
by PointB.
ThePPFS
cleariysbowPirateJack'sabsolute
advantagein food production.But do they indicate
any comparative
advantage
for eitherSelkirkor
PirateJack?To answerthis question,we must first
calculatethe opportunitycostassociated
with
eachactivity.
Selkirk'sdatashowthat for every l0 turnips he
gathers,
hegivesup the opportunityto dig tOclams.
Sohis opportunitycostfor eachrurnip is I clam,
and his opportunity costfor eachclam is I tlrnip.
Piratelack hasdifferentopportunirycosts.For
every30 turnipshe gathers,he givesup the opportunityto dig 15clams.Thatmeansthat PirateJack's
opportunity costfor eachturnip is ] dam, while
hisopportunity
cosrfor eachclami! 2 turnips.
The oppodunitycostsfor both men areshownrn
Figure4.3C.
As the tableaboveshows,pirateJacktoppor
tunity costfor gatheringturnipsis lowerthan
Selkirki:] clamfor PirateJackversus1 clamfor
ad nSelkjrk.This givesPinte Jacka comparative
tageoverSelkirkin gatheringturniPs.On the other
hand,Selkirk'sopportunitycostfor diggingclams
is lower: I turnip for Selkirkversus2 tumiPs for
PirateJack.This meansthat Selkirk hasa comparative advantageoverPiratetack in diggingclams,
advantage.
eventhoughhe doesnot havean absolute
Advantage
Basedon Comparative
Specialization
BenefitsBothTradingPartners
theory,Selkik and Pirate
Accordingto Ricardo's
Ja& shouldeachspecializeio the activity in which he
has a comparativeadvantage.That would meanthat
Selkirkshoulddig clamsand Piratelackshouldgath€r
turnips. They could then trade with eachother to
obtaintheproducttheydo not produce.Butwould
this arangementwork to their benefit?
The tablein Figure4.3Dshowshow eachcastaway
might gainfrcm trading basedon comparativeadrantage.Thefrst two columnsof datr.provideproduction
valuesfor both menif theydo not
andconsumption
specialize
andtrade.Thesecolumnscontainth€valbt ?ointsA andB from Figure4.3B
uesrepresented
Thenext two columnsshorvproductionand
agreeto spe
consumptionvaluesifthe castaways
25
turniPs.The
trade
17
clams
for
cializeandthen
productionvaluesshowhow mucheachmancan
produceby specializing.
Theconsumptlon
values
indicatehow muchofboth productsthe mencould
haveif theythentradedwith eachother.
Thelast columnshowswhateachmanhasgained
from this trade.Selkirk now hastie 25turnips hegot
from PirateJack,alongwith the23 clamshedid nol
trade.His decisionto tradehasresultedin a gainof
5 turnipsand 3 clams.
'.
opporiunity co\t than orhercountries lheir
advrntage andrradrrg.
cornoaralive
\
\
As for PirateJack after trading 25 turnips to
Selkirk, he still has 95 left, 5 more than he would
havehad ifhad chosento go it alone.He alsohasthe
17 clams he got from Selkirk, 2 more than he would
have had without trade. So both castawayshave
gainedfrom specializationand trade.
The PPFSin Figure 4.3Eshowthe original
production possibilitiesfor the castaways,
alongwith
the increasedamounts they receivethrcugh trade.
Thosenew amounts,represenledby PointsA'and B1
sit outsidethe PPFcurve, thus indicatingthe gains
the castawayshave made as a result of trade
Comp6rativeAdvantageApplies to l{ations
as Well as lrtdividuals
What is true forindividuals is alsotrue for nations,
including the United States.When the principle of
comparative advantage is allowed to guide who produces what-for example, Flodda fa.mers growing
orangesand ldahofarmersBrowingpolaroes-cociety usuallybenefits.
Someofthe factorsthat give riseto comparative
ad%ntage, such as climate and natural resou.ces,may
be fairly obrious. The main reasonFlorida has an
advantageover Idaho in orangeproduction is that
orangesgrow better in warm climates.Likewise,
Nevada has a comparative advantage in Sold produc
tion becauseof its gold deposits.SaudiArabia excels
in oil prodrction becauseofits abundant oil rese es,
while Canadacan exploit its vast foreststo produce
timber. When it comes to farming, minhg, forestry,
and fishing, geographydetermineswherecomparative advantage lies.
Other factors-including education, wage ]evels,
and teclnology differences-also play a role in deter'
mining comparativeadvantage.The United States,
ririth its many colleges and universities, has a highly
skilled,high-wageworKorce. This givesthe United
Statesa comparative advantage in the development
of advancedtechnologies,such ascomputersystems.
Less developednations,on the other hand, tend to
haveretative\ unskilled,low wageworkforces-Such
countries often have a comparative advantage in the
production of assembly-linegoods,like clothing,
that do not require highly skilled labor.
The beauty ofcomparative advantage,as economists s€eit, is that it standsto benefitall tnding
partners.Countries that seemto have it allhigh human.apiral
abundanrnaturalresour.es.
can actuallygain more by specializingin what they
do bestand tladiog with othe! count es.But even
countdeswith no absoluteadvantagescan come out
ahead by finding what rr€l can produce at a lower