Question

Using the information below, discuss the following: "Unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system". Do you agree with this statement? Explain using the concept of comparative advantage.

Do you also trade with others? How do you apply comparative advantage to your own life? Give an example for how each of us is better off because we each specialize in certain tasks and trade with others.

Below is an example from my life:

I can teach 5 economics classes if I do this full time. I also would like to fix my car myself so I have to give up teaching 0.5 class hours just for oil change. If I want to change the tires I will need to give up 1.5 class hours. Now suppose that I decide to fix the engine in my car. That will definitely require more skills and I will have to get some training for that. That means I will have to give up teaching more classes (let’s say 3 classes). My opportunity cost will increase as I try to do more complex jobs for my car.

If I’m specialized in teaching economics, I have a comparative advantage in this task. That means, I can teach economics at a lower opportunity cost than other people. If I try to fix my car, my opportunity cost will be high as I will be giving up teaching so many classes to be able to do that. That’s why I never try to fix my car! I take it to a mechanic because the mechanic can do this job at a lower opportunity cost compared to my opportunity cost.

In other words, both I and the mechanic specialize in certain jobs and when we trade we are both better off!

For more on comparative advantage and trade, please see the following:

Comparative Advantage

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 is a powerful tool for understanding how we choose jobs in which to specialize, as well as which goods a whole country produces for export. Can one country produce everything so cheaply that other countries have no production options and no work opportunities for their citizens? Do large countries—which can produce more of everything—take unfair advantage of small countries when they trade?

The following video answers these questions using the comparative advantage concept:

Comparative Advantage

https://www.youtube.com/watch?v=4rUfoU04QJM&feature=emb_logo

Why Countries Trade?

Answer 1