Comparative advantage

“Arnold Kling(link to EconLog)”: asks how to explain comparative advantage so that a journalist understands it. Well, its perfectly possible. After all, the idea was put into circulation by a “stockbroker”: so it should be possible to explain it to any practical person. Of course, that may exclude many academic economists…
I’ve long believed that there are only two prerequisites for a good understanding of trade theory: a reasonable grasp of how the national accounts are put together and a good grounding in the concept of opportunity cost. Unfortunately, most ‘freshman’ economists have no idea about the first, and even some tenured professors seem to have a rather weak understanding of the second (maybe that’s why they’re tenured?). Journalists, and even bachelors of economics, can pretty readily understand from household behavior that it makes a lot of sense to buy what you cannot produce at as low a cost in terms of personal effort or convenience for yourself. Who bakes their own bread anymore except for fun? They certainly get the idea that the only way you are going to be able to afford to buy is to sell first what you produce at low cost to you, given your own talents, endowments etc. Its called, doing what you do best. In fact, its a pretty short step from this every-day stuff to the surprising revelations of comparative advantage: for example * that we export so we can import (imports are the prize of trade, not the price)
* that it doesn’t matter if you are smarter, richer or better looking than I am; we can probably do a deal that makes us both better off by trading what we individually do at least cost (money, convenience) for what the other does at his own lower cost (money, convenience) The clincher, I usually use is the story about the busy lawyer and her secretary. The $200/hour lawyer types faster and more accurately than her $25/hour secretary. When the pressure is on, she sometimes wonders if she should persist with her secretary or do the work herself. In all my work with students, business people and even journalists in Australia and in my work for the UN in two dozen countries, I’ve never met anyone who didn’t get the point of that story. The real buzz of comparative advantage is watching people discover how powerful a simple idea can be. The problem, I find, is that many people assume the idea doesn’t scale. They are afraid to apply the same analysis to global exchange. If you say: “Now, suppose we are talking about a deal between a rich country and a poor country; do you think that the same rule applies?”… they frequently get cold feet. Suddenly, imports become a threat and (bizzarely) exports become the purpose of trade.

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