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Comparative Advantage : The ability of an individual, firm, or nation to produce a good or service at a lower opportunity cost than other economic actors. This is

Comparative Advantage: The ability of an individual, firm, or nation to produce a good or service at a lower opportunity cost than other economic actors. This is from the video “Comparative Advantage” in the Principles of Microeconomics course.

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As we saw in the previous videos, we enjoy enormous benefits from specialization and trade. One reason for this beneficial cooperation is what economist call Comparative Advantage.


Two things are surprising about comparative advantage: first, just by rearranging who does what we can make more stuff through specialization in trade even if no one ever gets any better at doing any line of work. But the second insight's my favorite. If you get better at doing something, that obviously benefits you, but it also benefits me even though my abilities to produce haven't changed at all. Let me show you how this works.


It's best seen with a simple example, just two people, Bob and Ann, who produce just two goods, bananas and fish. Here's what Bob can do if he spends all of his time producing only one good. Bob can either gather 10 bananas or he can catch 10 fish. Ann can either gather 10 bananas or catch 30 fish, so let's say they each split their time between producing bananas and fishing. Bob and Ann each produce five bananas, Bob produces five fish and Ann produces 15 fish, in total they produce 10 bananas and 20 fish. You math wizards in the audience surely see an obvious way to increase this total. If Bob produces just bananas and Ann produces just Fish, then the total rises to 10 bananas and 30 fish.


So just by rearranging who does what, you get more total stuff, and you might think this outcome is simply, the result of the division of labor that we covered previously, but you'd be wrong. The key insight from the division of labor is that workers individually get more productive when they specialize, yet in this scenario neither Bob nor Ann has gotten any better at producing Bananas or fish. Just by rearranging which tasks each does is what made total production increase.

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