3.1 A Parable for the Modern Economy

Production Possibilities:

• Given the opportunity to a profession in one skill allows that individual to strengthen their techniques and to trade with other professionals who are skilled in another skill

Specialization and Trade:

• Instead of being self-sufficient while facing a trade-off of whether you should spend time on one skill or the other, trading allows you to gain a benefit out of your own skill and collect other resources that you didn’t have access to.

3.2 Comparative Advantage: The Driving Force of Specialization

Absolute Advantage:

• The ability to produce a good using fewer inputs than another producer

Opportunity Cost and Comparative Advantage:

• Opportunity cost- whatever must be given up to obtain some item

• Comparative advantage- the ability to produce a good at a lower opportunity cost than another producer

  • It is impossible for one person to have a comparative advantage in all of the available options.

Comparative Advantage and Trade:

• Trading allows people to specialize in activities in which they have a comparative advantage.

The Price of the Trade:

• The price of the trade must lie between the two opportunity costs

• One must be the buyer, and one must be the seller of the deal for the economy to run

3.3 Applications of Comparative Advantage

Should Tom Brady Mow His Own Lawn?

• Imagine that Brady can move lawns fast, and he’s offered $40 to mow a lawn within 2 hours. In that same 2 hours, Brady can film a television commercial and earn $20,000.

  • In this situation, Brady has the advantage in mowing the lawn because he can do the work with a low input of time. Yet, his opportunity cost of moving the lawn is $20,000 and his offered opportunity of lawn mowing is $40.

  • So, Brady should film the commercial and hire the person who offered him to mow the law. As long as Brady pays them more than $40 and less than $20,000, they are both better off.

Should the United States Trade with Other Countries?

• Imports- goods produced abroad and sold domestically

• Exports- goods produced domestically and sold abroad

• International trade can make some individuals worse off, even as it makes the country as a whole better off

  • Different people from different places have different interests

  • Trade allows all countries to achieve greater prosperity