The ability to produce something with less of a societal cost as compared to the next guy.
Another hypothetical situation: Rochester and Cornell students can create wine and cameras. Rochester students are able to create 10 bottles of wine per year and 5 cameras per year, while Cornell students can only create 3 bottles of wine per year and 4 cameras.
+Rochester students have an absolute advantage in making wine over Cornell students.
+Rochester students have an absolute advantage in making cameras over Cornell students.
Two questions arise:
- Who is more efficient?
- What is sacrificed?
Rochester Cornell
Cameras: 5 cameras "cost" 10 wines 4 cameras "cost" 3 wines
1 camera = 2 wines 1 camera = 3/4 wine
Wine: 10 wines "cost" 5 cameras 3 wines "cost" 4 cameras
1 wine = .5 cameras 1 wine = 4/3 cameras
+Rochester has a comparative advantage in producing wine over Cornell.
BUT no producer can have comparative advantage at producing everything.
+Cornell has a comparative advantage in producing cameras over Rochester.
Suppose Rochester ONLY produced wine, and Cornell ONLY produced cameras:
Initially Rochester has 10 wines and 0 cameras, and Cornell has 0 wines and 4 cameras. If Rochester trades Cornell 3 wines for 3 cameras, it has 7 wines and 3 cameras in the end. Cornell has 3 wines and 1 camera. Both parties increased their PPF slope, and are therefore richer as the result of the trade.
If you decide to specialize and trade, it makes us richer. This is because it uses less of the earth's resources, and you get more outputs for the same amount of inputs. Each party pays for their imports with their exports.
- Self-sufficiency is the road to poverty.
- What a country ends up producing is what it's relatively better at.
- Policies that restrict trade make people poorer.
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