Meaning of COMPARATIVE ADVANTAGE (CONT.) in English

COMPARATIVE ADVANTAGE (CONT.)

The distinction between comparative and absolute advantage is important because it is comparative advantage (and not absolute advantage) that determines the amount of the potential gains in output from specialization and trade between the two actors. And this leads us to the Principle of Specialization According to Comparative Advantage :

Total production of goods will be increased if each economic actor devotes more of his scarce resources to producing the good(s) in which he has a comparative advantage and less of his scarce resources to producing the good(s) in which he has a comparative disadvantage.

In our example, if Mr. A works 180 hours a month producing only widgets (the area of his comparative advantage), he can produce 18 widgets. If Mr. B works 180 hours a month producing only whatsits, he can produce 18 whatsits.

If the two actors can agree to trade goods at any exchange ratio ("price") that is somewhere between the (different) opportunity cost ratios of the two actors [in our example, anything between two whatsits per widget and three whatsits per widget], then both actors will be able to have more of both goods ("be better off") with specialization than would be possible without specialization, even if one actor has an absolute advantage over the other in production of both goods. Mr. A will not voluntarily plan to trade away any of his widgets for less than 1/3 of a whatsit each because he can make the whatsits himself at that price, but he will come out ahead if Mr. B will give him more than 1/3 whatsit per widget. Mr. B will not voluntarily plan to trade away any of his whatsits at a price of more than 1/2 whatsit per widget because he can make widgets for himself at that price, but he will be ahead of the game if Mr. A will swap him at less than 1/2 whatsit per widget. Thus there is plenty of room for the two to bargain out a deal that is beneficial to both. (Through trade, each can have at least the same amount of widgets and whatsits that he would enjoy if each produced both products for his own consumption -- plus the added benefit of the hours saved via specialization, that can be enjoyed either directly in the form of extra leisure time or indirectly by using the hours saved to produce still more of these or other goods.)

However, if some kind of legal or illegal coercion (or perhaps extreme moral pressure from public opinion in a very traditional society) is exerted to fix an exchange ratio for the two goods that is not within the bargaining range between the opportunity cost ratios of the two actors, then either:

1. Trade will not take place at all between them (because one actor would be worse off than if he produced both goods for himself and hence will not voluntarily agree to specialize so as to trade on such terms)

2. An "exploitive" division of labor (such as slavery, serfdom, corvee, etc.) will somehow be imposed involuntarily so as to benefit one actor by assigning him all the gains from specialization and then some, at the expense of worsening the condition of the other "involuntarily specialized" actor.

[See also: absolute advantage , division of labor , specialization , cost ]

English glossary of political economy terms.      Английский глоссарий политико-экономических терминов.