Question

Discuss why you think comparative advantage has become the fundamental and accepted theory of trade. Provide concrete examples.

Answer 1

Answer-

Introduction

If you do everything better than anyone else, should you be self-sufficient and do everything yourself? Self-sufficiency is one possibility, but it turns out you can do better and make others better off in the process. By instead concentrating on the things you do the "most best" and exchanging or trading any excess of those things with someone else for the things that person does the "most best," you can both be better off. Comparative advantage fleshes out what is meant by "most best". It is one of the key principles of economics.

Comparative Advantage

If Ann spends all of her working time gathering bananas, she gathers one hundred bunches per month but catches no fish. If, instead, she spends all of her working time fishing, she catches two hundred fish per month and gathers no bananas. If she divides her work time evenly between these two tasks, each month she gathers fifty bananas and catches one hundred fish. If Bob spends all of his working time gathering bananas, he gathers fifty bunches. If he spends all of his time fishing, he catches fifty fish. Table 1 shows the maximum quantities of bananas and fish that each can produce.If Ann and Bob do not trade, then the amounts that each can consume are strictly limited to the amounts that each can produce. Trade allows specialization based on comparative advantage and thus undoes this constraint, enabling each person to consume more than each person can produce

Concrete Examples

• Don Boudreaux on Globalization and Trade Deficits. Podcast on EconTalk.

  Don Boudreaux, of George Mason University, talks about the ideas in his book, Globalization. He discusses comparative advantage, the winners and losers from trade, trade deficits, and inequality.Trading countries both achieve gains from trade: Foreign Trade, or The Wedding Gown, by Jane Haldimand Marcet in John Hopkins's Notions on Political Economy. 1831."Then I hope your honour will set us right," replied Bob.—"Why," said the landlord, "I maintain that, when two countries trade freely with each other, they are both gainers."."This requires some explanation," said the landlord, "which I will try to give you. Foreigners send over to us such goods as they can make or produce cheaper and better than we can; therefore, when we buy those goods, we get them cheaper or better than we could have made them ourselves."