What is comparative advantage? And why is it important to trade? This video guides us through a specific example surrounding Tasmania — an island off the coast of
What is comparative advantage? And why is it important to trade? This video guides us through a specific example surrounding Tasmania — an island off the coast of Australia that experienced the miracle of growth in reverse. Through this example we show what can happen when a civilization is deprived of trade, and show why trade is essential to economic growth.
In an economy with a greater number of participants trading goods and services, there are more ways to find a comparative advantage and earn more by creating the most value for others. Let’s dive right in with an example from our new friends, Bob and Ann. This video is from Don Boudreaux's Trade and Prosperity section of Everyday Economics.
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Great Lectures Prof. Now at 6:19 in your video you posed a very important Q&A on comparative advantage (CA) as follows... How do you know what your (CA) is? "what you get paid for it..." well it might be true in part but a bit over generalized as the word good is "subjective".
we are all good at something but to some degree. I used to have this saying "You're good with regards to the subset of people you around at any particular time". That being the case could you elucidate a bit on what you meant by that.
Right, the "what you get paid for it" type of answer assumes a subjectivist theory of value, or of what are the kinds of things which are good. This is an assumption made by all economists. For them "how do you know how much better your work is than other people's?" reduces to "how much do you and other subjects want your work / are willing to pay for it?". Imagine there were no obstacles against using markets: no transaction costs of adevrtising what I do to all people, and no transactions costs for anyone to bid for my work. Then, I would sell my work to the highest bidder and my pay would reflect the value of my comparative advantage. Then, everyone would be "around me" and i would be around everyone. In this scenario, my pay would reflect how good I am with regards to everyone else, because everyone else is competing with me and yet my demanders choose to pay you rather than anyone else. This is true even if the service I supply is dubious. The group of those who dislike what I do pays me less to not do it than the group who pays me to continue doing it. The net value measures my worth.
In the video however, everyone already agrees than bananas and fish are good. If catching fish is good, then, since your opportunity cost of making one fish is one third of a banana, and my opportunity cost is a whole banana, then you are objectively better than I am.