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Comparative Advantage

© Frank Monaldo

For those of us who took Economics 101 as undergraduates, deep in the recesses of our memory and knowledge we can dust off the old principle of international trade called "comparative advantage." This economic theory attributed to English economist David Ricardo is not particularly obvious but, nonetheless, it is crucial in understanding the benefits of international trade. Given the protectionist predispositions of organized labor on the left and the Pat Buchanan contingent on the right, perhaps some salutary benefit could be derived from reviewing the concept "comparative advantage."

It is much easier to appreciate the principle of "absolute advantage," the argument that different countries are better at producing goods and that international trade in such a context maximizes material well-being for both trading partners.

Consider the following trivial example. Let us assume that the US can produce 1 VTR (video tape recorder) with 1 hour of labor and 1 ton of wheat for 1 hour of labor. If the US can devote 100 hours to production (50 hours to VTRs and 50 hours to wheat production), it will produce 50 VTRs and 50 tons of wheat.

Now let us assume that Taiwan is more efficient in VTR production, producing 2 VTRs for every 1 hour of labor, i.e. Taiwan has an "absolute advantage" in VTR production. Assume at the same time that Taiwan can produce only 0.5 tons of wheat with 1 hour of labor. The US has an absolute advantage in wheat production. Alone, without trade, Taiwan, with 100 hours of labor, can produce 100 VTRs and 25 tons of wheat. (Table 1)

Table 1: Production with an absolute advantage in VTRs for Taiwan and in wheat for the US and no international trade.

USA Production	Taiwan Production	Total Production
50 VTRs	100 VTRs	150 VTRs
50 tons of wheat	25 tons of wheat	75 tons of wheat

For the case where the US and Taiwan do not engage in trade, the total combined production is 150 VTRs and 75 tons of wheat. Now if Taiwan devotes all its labor in the production of VTRs and the US employs all its labor in the production of wheat, the total world production increases to 200 VTRs and 100 tons of wheat. With international trade, 100 hours of US labor will buy in 100 VTRs and 50 tons of wheat. International trade increases material well being for both countries. (Table 2)

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