Comparative Advantage
-
0:13 - 0:18- Let me tell you about the island of
Tasmania. It's about 130 miles off the -
0:18 - 0:24coast to South-Eastern Australia. A long
time ago when seas where low, Tasmania was -
0:24 - 0:28part of Australia. During that time, the
archaeological record documents that -
0:28 - 0:34Tasmanians fished and they used bone
tools. About 10 thousand years ago, rising -
0:34 - 0:39waters cut Tasmania off from Australia on
at least three of the smaller islands, and the -
0:39 - 0:44isolated human population died out
completely. In Tasmania the four thousand -
0:45 - 0:50hunter gatherers remained with no contact
with the rest of humanity at all. They -
0:50 - 0:54lost technologies they once had, no more
fishing, no more bone tools, they also -
0:55 - 0:59missed new inventions such as stone tools,
fishing nets and fire that were adopted in -
0:59 - 1:05Australia. When Europeans discovered the
Tasmanians in 1642, they found that this -
1:05 - 1:09extreme isolation had created the simplest
material culture of any people in the -
1:09 - 1:15modern world. Without access to other
people some island populations shrink, and -
1:15 - 1:22others even vanish. Fortunately for most
of us, human cooperation has expanded over -
1:22 - 1:28time. As we saw in the previous videos, we
enjoy enormous benefits from -
1:28 - 1:32specialization and trade. One reason for
this beneficial cooperation is what -
1:32 - 1:37economist call Comparative Advantage. Two
things are surprising about comparative -
1:38 - 1:43advantage: first, just by rearranging who
does what we can make more stuff through -
1:44 - 1:48specialization in trade even if no one
ever gets any better at doing any line of -
1:48 - 1:53work. But the second insight's my favorite.
If you get better at doing something, that -
1:53 - 1:58obviously benefits you, but it also
benefits me even though my abilities to -
1:58 - 2:03produce haven't changed at all. Let me
show you how this works. -
2:03 - 2:09It's best seen with a simple example, just
two people, Bob and Ann, who produce just -
2:09 - 2:15two goods, bananas and fish. Here's what
Bob can do if he spends all of his time -
2:16 - 2:24producing only one good. Bob can either
gather 10 bananas or he can catch 10 fish. -
2:24 - 2:30Ann can either gather 10 bananas or catch
30 fish, so let's say they each split -
2:30 - 2:35their time between producing bananas and
fishing. Bob and Ann each produce five -
2:35 - 2:43bananas, Bob produces five fish and Ann
produces 15 fish, in total they produce 10 -
2:44 - 2:49bananas and 20 fish. You math wizards in
the audience surely see an obvious way to -
2:49 - 2:55increase this total. If Bob produces just
bananas and Ann produces just Fish, then -
2:55 - 3:00the total rises to 10 bananas and 30 fish.
So just by rearranging who does what, you -
3:01 - 3:05get more total stuff, and you might think
this outcome is simply the result of the -
3:05 - 3:10division of labor that we covered
previously, but you'd be wrong. The key -
3:10 - 3:14insight from the division of labor is that
workers individually get more productive -
3:15 - 3:20when they specialize, yet in this scenario
neither Bob nor Ann has gotten any better -
3:20 - 3:25at producing Bananas or fish. Just by
rearranging which tasks each does is what -
3:25 - 3:29made total production increase. The key to
understanding how this works is -
3:29 - 3:34opportunity cost. Bob has to choose to
gather bananas or catch fish. When he -
3:34 - 3:40chooses to gather bananas he gives up one
fish in essence, Bob trades with himself. -
3:40 - 3:45He can use his time to gather bananas or
trade that time to catch fish, and the cost -
3:45 - 3:51of that trade is one fish per banana.
That's Bob's opportunity cost. The same -
3:51 - 3:56holds through for Ann but her cost of
producing one banana is three fish. In the -
3:57 - 4:00amount of time that it takes Ann to gather
one banana, she could have caught three -
4:00 - 4:05fish. She trades with herself one banana
for three fish. -
4:06 - 4:10So Bob only has to give up one fish to
produce one banana but Ann must give up -
4:11 - 4:15three fish to produce a banana. Ann's
opportunity cost of gathering a banana is -
4:16 - 4:20higher than Bob's. She can improve her
situation if she can get bananas for less -
4:21 - 4:25than three fish and Bob can improve his
situation if he can get fish for less than -
4:25 - 4:33one banana. Let's say Ann trades two fish
to Bob for one banana. They each gain, and if -
4:33 - 4:39Ann wants a banana, she can either gather
herself and give up three fish or she can -
4:39 - 4:44catch only two fish and then trade them to
Bob. She prefers the lower-cost option and -
4:45 - 4:50so she trades. Bob prefers the lower cost
option too. Instead of giving up a whole -
4:50 - 4:55banana to catch a fish he can trade that
banana for two fish, now he's only giving -
4:55 - 5:00up a half of banana for a fish. You can
see that even if Ann is better at -
5:00 - 5:05everything, nothing in this story changes.
She still benefits from trade because the -
5:05 - 5:10number of fish Ann gives up to pick a
banana herself is greater than the number -
5:10 - 5:15of fish that she must catch and give to
Bob in order to get a banana from Bob. -
5:15 - 5:19Now for an insight that is really
counter-intuitive: what happens if Ann -
5:19 - 5:24gets better at fishing. Let's say that she
can now catch 40 fish. Obviously that's -
5:24 - 5:28good for Ann, but it also means a banana
just got more costly for Ann to produce -
5:29 - 5:33herself. She now has to sacrifice four
fish for each banana that she gathers. By -
5:33 - 5:39becoming a better fishermen, Ann becomes a
comparatively worst banana gatherer, and -
5:39 - 5:44this fact helps Bob. The reason is that
Ann is now willing to trade more fish for -
5:44 - 5:49each banana that she gets from Bob. So
although Bob's ability to produce hasn't -
5:49 - 5:55changed, he can now get more fish for his
bananas. Comparative advantage is a -
5:55 - 6:00beautiful thing: no matter what my talents
are, I can still help you even if you are -
6:00 - 6:04better at everything.
The more different we are from each other, -
6:04 - 6:10the more we benefit from trading with each
other. Let's get back to the real world. -
6:10 - 6:13What comparative advantage practically
means for most people is that we each -
6:13 - 6:18spend most of our working time at a job
that utilizes each of our comparative -
6:18 - 6:22talents. How do you know what your
comparatively good at? What you get paid -
6:22 - 6:27for your job tells you that. Comparative
advantage is the main force driving us to -
6:27 - 6:32use our talents in those jobs that we do
best. That's why people who are good at -
6:32 - 6:35math tend to become engineers, and those
who have good graphic sense tend to go -
6:35 - 6:40into the arts. Specialization and trade play
key roles in the movement from poverty to -
6:40 - 6:45prosperity. We would be desperately poor
without them, but they alone do not explain -
6:46 - 6:50the full extent of our prosperity. Another
feature the modern world is important, -
6:51 - 6:57Innovationism. Our society is an orgy of
innovations. This innovationism would be -
6:57 - 7:00impossible without specialization and
trading, yet specialization and trade do -
7:00 - 7:05not guarantee innovationism. This is a
topic for a future video.
- Title:
- Comparative Advantage
- Description:
-
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.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomicsAsk a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-definition-tasmania#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-definition-opportunity-cost
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 07:15
Terri Adams edited English subtitles for Comparative Advantage | ||
Terri Adams edited English subtitles for Comparative Advantage | ||
Terri Adams edited English subtitles for Comparative Advantage | ||
Terri Adams edited English subtitles for Comparative Advantage | ||
MRU2 edited English subtitles for Comparative Advantage | ||
MRU2 edited English subtitles for Comparative Advantage | ||
MRU2 edited English subtitles for Comparative Advantage |