What surprised me most about the concepts in this chapter had to do with comparative advantage and trade. First off, a few brief definitions:
Absolute advantage: the ability to produce a good or service at a lower cost per unit than a competitor.
Comparative advantage: the ability to produce a good or service at a lower opportunity cost than a competitor.
When I came to this sentence in our textbook: "The gains from specialization and trade are based not on absolute advantage but on comparative advantage" I have to say I was taken aback. In my mind I would automatically assume it would be based on some calculation of both, and I was confused as to how and why it would only be based on the one. Alas, after further reading... *ding* - light bulb!
Our textbook poses the question "Should Tom Brady mow his own lawn?" in which lies the resolution of my confusion. The example goes something like this:
Mr. Brady is capable of mowing his lawn in two hours, while the neighbor boy would do it in four. Mr. Brady has the absolute advantage because it takes him less time to mow the lawn. BUT, in that same two hours, Mr. Brady could instead film a commercial and earn $20,000; and the neighbor boy - in his four hours - could earn $40 working at Mickey D's. Tom Brady's opportunity cost of mowing the lawn: $20,000; neighbor boy's: $40. Accordingly, it's the neighbor kid that has the comparative advantage.
*DING!* Now it all makes sense. Of course Mr. Brady should hire the boy to mow the lawn.
Shifting gears...
International trade - it's a good thing!
Without international trade, a country would be restricted to goods/services produced within its borders, and miss out on the valuable revenue and growth that comes from global trade. International trade also stabilizes seasonal market fluctuations; and it allows for greater efficiency.
And that is all for now...
Ciao!
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