Another Look at Comparative Advantage

Comparative advantage explains why people trade and what goods they should trade. To illustrate the concept of comparative advantage, we ask: Should Martha Stewart

Comparative advantage explains why people trade and what goods they should trade. To illustrate the concept of comparative advantage, we ask: Should Martha Stewart iron her own shirts? Even if Martha Stewart has an absolute advantage in ironing shirts, her opportunity cost is simply too high! We’ll go over the concepts of absolute advantage and opportunity cost in depth using more examples, too.

Ready to test your knowledge? We introduce several homework questions in this video and we’ll cover the answers in another video in this section.

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Show 1 Answer (Answer provided by Alex Tabarrok)
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Good question. Ultimately, wages are determined by productivity so wages are included in the model but implicitly. We go into this in more detail in our textbook. Here is the gist. Suppose computers cost $300 and shirts $100 then, using the pre-trade figures, if Mexico uses 24 units of labor to produce 1 computer and 6 shirts the total value of consumption is $900 and since workers in equilibrium all receive the same wage they each receive $37.50. You can do a similar calculation for the US - you should get $200.

You should also do these calculations using the after specialization (with trade) figures and you will find that wages in both countries increase because productivity increases.

So the model is actually quite deep as it also includes wages and the wage story is consistent with the story that focuses on output directly.Of course, the model doesn't include other factors like minimum wages or unions or lots of other things but that would obscure the point of the model.

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