12 Comparative Advantage
Objectives
- Compute the opportunity cost of performing an activity
- Identify comparative and absolute advantage
- Use comparative advantage to assign specializations
This section studies comparative advantage. We focus on a simple question: how should we assign people who are less productive? When people have talents for something the answer is clear: assign them to what they are best at. This problem becomes more challenging when someone is less good at everything. Economic’s answer to this problem is comparative advantage. We can interpret this as assigning people based on what they are relatively good at. In the theory, we will give this a more clear definition.
We consider two roommates, Jamie and Helen, who need to vacuum the house and produce meals. The following table lists their productivity, or how long it takes to complete each activity.
| Productivity | Vacuum the House | Produce one Meal |
|---|---|---|
| Jamie | 4 hours | 1 hour |
| Helen | 4 hours | 2 hours |
We now introduce the concept of absolute advantage, which is our traditional notion of who is ‘better’ at something. In this case, Jamie and Helen are at a tie for vacuuming the house, so neither has an absolute advantage. For meals, Jamie takes less time to make a meal, so he has an absolute advantage in producing meals.
We now introduce our concept of comparative advantage. We begin by computing the opportunity cost. The following table shows the opportunity cost.
As an example, it takes Jamie 4 hours to vacuum the house. In those 4 hours, he could have made 4 meals. Therefore, Jamie’s opportunity cost of vacuuming the house is 4 meals.
Similarly, it takes Helen 2 hours to produce one meal. In 2 hours, Helen could have vacuumed 1/2 the house. Therefore, Helen’s opportunity cost of one meal is vacuuming 1/2 of the house.
| Opportunity Cost | Vacuum the House | Produce one Meal |
|---|---|---|
| Jamie | 4 meals | Vacuum 1/4 House |
| Helen | 2 meals | Vacuum 1/2 House |
Comparative advantage is based on who has a lower opportunity cost for an activity. Note that in our table of opportunity costs, we want to look down each column. For vacuuming the house, Helen has a lower opportunity cost (2 meals), so Helen has a comparative advantage in vacuuming. Likewise, Jamie has a lower opportunity cost of producing a meal (vacuuming 1/4 the house), so Jamie has a comparative advantage in producing meals.
| Specialize in: | Vacuuming | Meals |
|---|---|---|
| Option 1: Comparative Advantage | 1 house | 4 meals |
| Option 2: Non comparative advantage | 1 house | 2 meals |
12.1 Conclusion
- This lecture introduces the concept of comparative advantage
- Absolute advantage measures who is more productive
- Comparative advantage tells us how to assign work
- Is based on who is ‘relatively productive’, or who has a lower opportunity cost