Comparative advantage and trade (How do you determine your comparative advantage?) - Regina Gauger
Comparative Advantage and TradeHow do you determine your comparative advantage? What is Comparative Advantage? In order to study comparative advantage, it is essential to have a clear understanding of the definition. According to Wikipedia.com, “In economics, the law of comparative advantage says that two countries (or other kinds of parties, such as individuals or firms thereas) will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods (absolute advantage) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies” (2011). Economics Interactive describes it in a few additional details, “A comparative advantage in producing or selling a good is possessed by an individual or country if they experience the lowest opportunity cost in producing the good” (2011). Furthermore, “The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law. The law of comparative advantage: Mutually beneficial exchange is possible whenever relative production costs differ prior to trade” (Economics Interactive, 2011). “This law applies to all exchanges, whether between individuals or nations” (Economics Interactive, 2011). It goes on to state, “Opportunity cost is the key to comparative advantage: Individuals and nations gain by producing goods at relatively low costs and exchanging their outputs for different goods produced by others at relatively low cost. All potential trading partners can gain enormously through appropriate specialization and exchange” (2011). Examples of Comparative Advantage With a clearer understanding of what comparative advantage is, it is easy to explore some examples of comparative advantage. Who has a comparative advantage, how did they get it, and how do they keep it? A common arena to generally expect comparative advantages would include technology, but more specifically, a company named Apple. In one opinion, “Have you noticed that Apple doesn't live by the version-three rule? In the PC industry, there is this rule that some of the branded vendors take three tries to get something right. Apple often gets it in one try. The first iteration might not be perfect, but it is often so close to the ideal that the difference is insignificant” (Enderle, 2004). In Enderle’s opinion, he goes on to express another one of Apple’s critical advantages. “Where Apple really stands out is in marketing. The company simply seems to understand what will get people excited about its products, and then it executes on that vision. You don't see the company mainly talking about features or technology, but about how the computer will make your life better” (2004). Therefore, it would appear a combination of these reasons stand to give Apple a comparative advantage. Now let’s explore the apparel industry. “Despite the chronic energy crisis, the gas shortages, the bombings, the terrorism and the violence, Pakistani apparel is one of the lowest cost options for US-based buyers, cheaper even than Bangladesh, India and China, according to American buyers of textiles” (Alam, 2011). The article goes on to say, “Another advantage that Pakistan has over its competitors, especially Bangladesh, is good quality, home-grown cotton. Pakistan produces short-staple cotton, which is good for denim, flannels, fleece, knits, polo shirts and t-shirts” (2011). Furthermore, “Pakistan has excellent washing, dyeing and finishing techniques, enabling it to create fashion-forward, value-added garments” (Alam, 2011). Similarly to the Apple example, a comparative advantage for Pakistan might be the result of a blend of qualities. In this final example, "Colombia has become the major center of production and trafficking of cocaine and a principal supplier of heroin to the United States because it has developed a comparative advantage for producing illegal goods and services. Undoubtedly, if there were no demand, drugs would not be produced. But it is also true that if there were no supply, nobody would consume. These are valid but trivial and incomplete paradigms. Every elementary economics course teaches that demand and supply are the two blades of a pair of scissors, with both necessary to create a market" (Thoumi, 18). So even though drug trafficking and other activities in Colombia are illegal, does not mean a comparative advantage can’t exist. How do you determine if you have a comparative advantage? The final question to assess is how do you determine if you have a comparative advantage? In the Apple example, much of its advantage is attributed to its design and marketing capabilities. “Apple's designs are, well, elegant” and “Apple also has not been afraid of in-your-face campaigns” (Enderle, 2004). It appears these attributes along with revenues of $108 million in fiscal year 2011 would determine that Apple is doing something right, and does in fact have a comparative advantage amongst its competitors (Apple Inc., 2011). The second example of the apparel industry implies that Pakistan has a comparative advantage. “The cost differentials can be as high as 25%, substantial in an industry that generally operates on low margins for exporters. For example, a hooded sweatshirt, which is made at the rate of $12 a piece in China, is manufactured in Pakistan for $9 to $10. Similarly, a pair of jeans, whose manufacturing cost is $10 in China, costs $8 to $8.50 in Pakistan” (Alam, 2011). In the Colombia example above, their advantages are not limited to only drug production. “Colombia is today the largest grower of illegal coca and the largest producer of cocaine in the world. It is also a principal supplier of heroin to the US market. It is the first or second largest producer of counterfeit US dollars; has the highest number of kidnappings and assassins for hire; is second in the number of child warriors and displaced people; is the first or second largest Latin American exporter of prostitutes; and has the longest or second longest running Marxist guerrilla insurrection. Colombia is a producer of top quality EU passports and Euros. In mid-2006 the police found a factory producing the very hard to counterfeit Australian dollars. Inevitably, in these circumstances, corruption is widespread” (Thoumi, 16). But the question remains, “Amphetamine production can take place anywhere yet it is concentrated in a few places, notably where there is social tolerance for such production or for illegality” (Thoumi, 19). So how did Colombia gain a comparative advantage in drug production? "To answer this question it is necessary to explain how and why Colombia developed an environment that favored the growth of an illegal drug industry. Individual human behavior is limited by explicit social and legal norms and laws and by socially determined personal constraints. To explain why Colombia is prone to illegal economic activities it is necessary to explain why the state and other institutions such as family, religion, schools and peer groups do not impose limits on individual behavior but tolerate the breaking of the law and social norms. Colombia has less civil solidarity, reciprocity and trust, and a weaker national identity, than other societies in Latin America" (Toumi, 19-20). In this situation, it appears the acceptable nature of the environment might have been the largest contributing factor. The Opposition Insofar, it has been explained that a comparative advantage exist if one party has a relative efficiency over the other. However, during research, it was noted that this theory has been challenged and provides an interesting opposing perspective. It is discussed here as a means of presenting both sides of the argument. Ian Fletcher proposes the question, “Why don’t pro football players mow their own lawns? Because the average footballer can almost certainly mow his lawn more efficiently than the average professional lawn mower. The average footballer is, after all, presumably stronger and more agile than the mediocre workforce attracted to a badly paid job like mowing lawns. (If we wanted to quantify his efficiency, we could measure it in acres per hour.) Efficiency, also known as productivity, is always a matter of how much output we get from a given quantity of inputs, be these inputs hours of labor, pounds of flour, kilowatts of electricity, or whatever. Because the footballer is more efficient, in economic language he has absolute advantage at mowing lawns. Yet nobody finds it strange that he would “import” lawn-mowing services from a less efficient “producer.” Why? Obviously, because he has better things to do with his time” (Fletcher, 2011). Essentially Fletcher’s point of view holds true that a pro footballer would likely be more efficient at mowing the lawn than a professional lawn mower. And he goes on to explain, “The theory of comparative advantage says that it is advantageous for America to import some goods simply in order to free up our workforce to produce more-valuable goods instead. We, as a nation, have better things to do with our time than produce these less valuable goods. And, just as with the football player and the lawn mower, it does not matter whether we are more efficient at producing them, or the county we import them from is. As a result, it is sometimes advantageous for us to import goods from less efficient nations” (Fletcher, 2011). However, the key to this logic does not consider the opportunity cost forgone if the footballer were to stay home and mow his lawn, as oppose to attending and playing in this week’s game in order to earn a living, which would not be advantageous. Conclusion Each of the examples discussed exist in different industries, but as explored above, are still capable of obtaining and maintaining a comparative advantage in their respective markets. In conclusion, there are a variety of reasons why individuals, firms, and countries gain a comparative advantage, and even more so, how it is determined a comparative advantage exists at all. There are challengers of the theory; however, as discussed here, the law of comparative advantage clearly appears to exist. Multiple Choice Questions 1. The law of says that two will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. A. Comparative advantageB. Absolute advantageC. Opportunity costsD. All of the aboveE. None of the above 2. What does it mean if one country is more efficient in the production of all goods? A. Comparative advantageB. Absolute advantageC. Opportunity costsD. All of the aboveE. None of the above 3. What is the cost of the explicit and implicit resources that are forgone when a decision is made? A. Comparative advantageB. Absolute advantageC. Opportunity costsD. All of the aboveE. None of the above 4. The law of comparative advantage applies to which party? A. CountriesB. IndividualsC. FirmsD. All of the aboveE. None of the above 5. Comparative advantages are not limited to legal activities only. A. TrueB. False Multiple Choice Answers
1. A – Comparative advantage
2. B – Absolute advantage
3. C – Opportunity costs
4. D – All of the above
5. A - True
Summaries Summary 1: Supply and Demand (Also, include private goods vs. public goods, marginal analysis, producer and consumer surplus, and how it applies to perfect competition).
The paper begins by defining some very important key terms to the discussion of supply and demand. It proceeds to discuss variables that shift either the demand curve or supply curve. The paper then summarizes four examples of supply and/or demand shifts, including tablet computers, wine, gasoline, and water and energy. This paper was interesting and informative.
Summary 2: Government Policies – Price Ceilings, Price Floors, Excise Taxes, and the Economic Effects of Prohibition (alcohol, drugs, kidneys, etc.)
The paper begins by discussing Prohibition, how it came about and why. It proceeds to discuss the black market that emerged in light of the Prohibition era and then discusses the reasoning why Prohibition ended. The paper goes on to discuss examples of localized prohibition, as well as the highly debated legalization of marijuana. The paper was an interesting point of view and reminded us of a good insight that we can learn a lot from the effects of Prohibition.
Summary 3: Monopoly
The paper starts by clearly defining what constitutes a monopoly, as well as explaining the four sources that create monopoly power. It then proceeds to discuss legislation that was developed to aid in preventing the existence of monopolies. And finally the paper discusses some examples, one of an existing monopolistic situation and one of the potential for a monopoly. This paper was written well and provides useful information.
The paper begins by clearly defining some key terms related to risk, including, mean, variance, and standard deviation. It then proceeds to discuss the differences between risk aversion, risk neutral, and risk lover. The paper also includes some examples of these, and wraps up by discussing the optimal search. This paper was informative and provided real-life examples.
Summary 5: Property Rights and Incentives – Include the Tragedy of the Commons
The paper begins by defining property, right, and property rights as an economic idea. It proceeds to discuss government intervention and the necessity of regulations to control the use of common property. The paper goes on to discuss the Tragedy of the Commons, as well as how to avoid it. And the paper concludes with some real world examples. This was a very informative and interesting paper.
December 4, 2011
"A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.
Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?"
The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law.
"Colombia has become the major centre of production and trafficking of cocaine and a principal supplier of heroin to the United States because it has developed a comparative advantage for producing illegal goods and services. Undoubtedly, if there were no demand, drugs would not be produced. But it is also true that if there were no supply, nobody would consume. These are valid but trivial and incomplete paradigms. Every elementary economics course teaches that demand and supply are the two blades of a pair of scissors, with both necessary to create a market."
"Colombia is today the largest grower of illegal coca and the largest producer of cocaine in the world. It is also a principal supplier of heroin to the US market. It is the first or second largest producer of counterfeit US dollars; has the highest number of kidnappings and assassins for hire; is second in the number of child warriors and displaced people; is the first or second largest Latin American exporter of prostitutes; and has the longest or second longest running Marxist guerrilla insurrection. Colombia is a producer of top quality EU passports and Euros. In mid-2006 the police found a factory producing the very hard to counterfeit Australian dollars. Inevitably, in these circumstances, corruption is widespread."
But "Amphetamine production can take place anywhere yet it is concentrated in a few places, notably where there is social tolerance for such production or for illegality." So how did Colombia gain a comparative advantage in drug production? "To answer this question it is necessary to explain how and why Colombia developed an environment that favoured the growth of an illegal drug industry. Individual human behaviour is limited by explicit social and legal norms and laws and by socially determined personal constraints. To explain why
Colombia is prone to illegal economic activities it is necessary to explain why the state and other institutions such as family, religion, schools and peer groups do not impose limits on individual behaviour but tolerate the breaking of the law and social norms. Colombia has less civil solidarity, reciprocity and trust, and a weaker national identity, than other societies in Latin America." What Creates Comparative Advantage.pdf
To begin, I think it is important to start by defining comparative advantage. The basic definition from Wikipedia states, "In [[/wiki/Economics|economics]], the law of comparative advantage says that two countries (or other kinds of parties, such as individuals or firms thereas) will both gain from trade if, in the absence of trade, they have different relative [[/wiki/Opportunity_cost|costs]] for producing the same goods. Even if one country is more efficient in the production of all goods ([[/wiki/Absolute_advantage|absolute advantage]]) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.[1[[home#cite_note-0|]]][2[[home#cite_note-uslabor-1|]]][3[[home#cite_note-econbook-2|]]]"
- Regina Gauger
Comparative Advantage and TradeHow do you determine your comparative advantage?
What is Comparative Advantage?
In order to study comparative advantage, it is essential to have a clear understanding of the definition. According to Wikipedia.com, “In economics, the law of comparative advantage says that two countries (or other kinds of parties, such as individuals or firms thereas) will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods (absolute advantage) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies” (2011).
Economics Interactive describes it in a few additional details, “A comparative advantage in producing or selling a good is possessed by an individual or country if they experience the lowest opportunity cost in producing the good” (2011). Furthermore, “The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law. The law of comparative advantage: Mutually beneficial exchange is possible whenever relative production costs differ prior to trade” (Economics Interactive, 2011).
“This law applies to all exchanges, whether between individuals or nations” (Economics Interactive, 2011). It goes on to state, “Opportunity cost is the key to comparative advantage: Individuals and nations gain by producing goods at relatively low costs and exchanging their outputs for different goods produced by others at relatively low cost. All potential trading partners can gain enormously through appropriate specialization and exchange” (2011).
Examples of Comparative Advantage
With a clearer understanding of what comparative advantage is, it is easy to explore some examples of comparative advantage. Who has a comparative advantage, how did they get it, and how do they keep it?
A common arena to generally expect comparative advantages would include technology, but more specifically, a company named Apple. In one opinion, “Have you noticed that Apple doesn't live by the version-three rule? In the PC industry, there is this rule that some of the branded vendors take three tries to get something right. Apple often gets it in one try. The first iteration might not be perfect, but it is often so close to the ideal that the difference is insignificant” (Enderle, 2004).
In Enderle’s opinion, he goes on to express another one of Apple’s critical advantages. “Where Apple really stands out is in marketing. The company simply seems to understand what will get people excited about its products, and then it executes on that vision. You don't see the company mainly talking about features or technology, but about how the computer will make your life better” (2004). Therefore, it would appear a combination of these reasons stand to give Apple a comparative advantage.
Now let’s explore the apparel industry. “Despite the chronic energy crisis, the gas shortages, the bombings, the terrorism and the violence, Pakistani apparel is one of the lowest cost options for US-based buyers, cheaper even than Bangladesh, India and China, according to American buyers of textiles” (Alam, 2011). The article goes on to say, “Another advantage that Pakistan has over its competitors, especially Bangladesh, is good quality, home-grown cotton. Pakistan produces short-staple cotton, which is good for denim, flannels, fleece, knits, polo shirts and t-shirts” (2011). Furthermore, “Pakistan has excellent washing, dyeing and finishing techniques, enabling it to create fashion-forward, value-added garments” (Alam, 2011). Similarly to the Apple example, a comparative advantage for Pakistan might be the result of a blend of qualities.
In this final example, "Colombia has become the major center of production and trafficking of cocaine and a principal supplier of heroin to the United States because it has developed a comparative advantage for producing illegal goods and services. Undoubtedly, if there were no demand, drugs would not be produced. But it is also true that if there were no supply, nobody would consume. These are valid but trivial and incomplete paradigms. Every elementary economics course teaches that demand and supply are the two blades of a pair of scissors, with both necessary to create a market" (Thoumi, 18). So even though drug trafficking and other activities in Colombia are illegal, does not mean a comparative advantage can’t exist.
How do you determine if you have a comparative advantage?
The final question to assess is how do you determine if you have a comparative advantage?
In the Apple example, much of its advantage is attributed to its design and marketing capabilities. “Apple's designs are, well, elegant” and “Apple also has not been afraid of in-your-face campaigns” (Enderle, 2004). It appears these attributes along with revenues of $108 million in fiscal year 2011 would determine that Apple is doing something right, and does in fact have a comparative advantage amongst its competitors (Apple Inc., 2011).
The second example of the apparel industry implies that Pakistan has a comparative advantage. “The cost differentials can be as high as 25%, substantial in an industry that generally operates on low margins for exporters. For example, a hooded sweatshirt, which is made at the rate of $12 a piece in China, is manufactured in Pakistan for $9 to $10. Similarly, a pair of jeans, whose manufacturing cost is $10 in China, costs $8 to $8.50 in Pakistan” (Alam, 2011).
In the Colombia example above, their advantages are not limited to only drug production. “Colombia is today the largest grower of illegal coca and the largest producer of cocaine in the world. It is also a principal supplier of heroin to the US market. It is the first or second largest producer of counterfeit US dollars; has the highest number of kidnappings and assassins for hire; is second in the number of child warriors and displaced people; is the first or second largest Latin American exporter of prostitutes; and has the longest or second longest running Marxist guerrilla insurrection. Colombia is a producer of top quality EU passports and Euros. In mid-2006 the police found a factory producing the very hard to counterfeit Australian dollars. Inevitably, in these circumstances, corruption is widespread” (Thoumi, 16).
But the question remains, “Amphetamine production can take place anywhere yet it is concentrated in a few places, notably where there is social tolerance for such production or for illegality” (Thoumi, 19). So how did Colombia gain a comparative advantage in drug production? "To answer this question it is necessary to explain how and why Colombia developed an environment that favored the growth of an illegal drug industry. Individual human behavior is limited by explicit social and legal norms and laws and by socially determined personal constraints. To explain why Colombia is prone to illegal economic activities it is necessary to explain why the state and other institutions such as family, religion, schools and peer groups do not impose limits on individual behavior but tolerate the breaking of the law and social norms. Colombia has less civil solidarity, reciprocity and trust, and a weaker national identity, than other societies in Latin America" (Toumi, 19-20). In this situation, it appears the acceptable nature of the environment might have been the largest contributing factor.
The Opposition
Insofar, it has been explained that a comparative advantage exist if one party has a relative efficiency over the other. However, during research, it was noted that this theory has been challenged and provides an interesting opposing perspective. It is discussed here as a means of presenting both sides of the argument.
Ian Fletcher proposes the question, “Why don’t pro football players mow their own lawns? Because the average footballer can almost certainly mow his lawn more efficiently than the average professional lawn mower. The average footballer is, after all, presumably stronger and more agile than the mediocre workforce attracted to a badly paid job like mowing lawns. (If we wanted to quantify his efficiency, we could measure it in acres per hour.) Efficiency, also known as productivity, is always a matter of how much output we get from a given quantity of inputs, be these inputs hours of labor, pounds of flour, kilowatts of electricity, or whatever. Because the footballer is more efficient, in economic language he has absolute advantage at mowing lawns. Yet nobody finds it strange that he would “import” lawn-mowing services from a less efficient “producer.” Why? Obviously, because he has better things to do with his time” (Fletcher, 2011).
Essentially Fletcher’s point of view holds true that a pro footballer would likely be more efficient at mowing the lawn than a professional lawn mower. And he goes on to explain, “The theory of comparative advantage says that it is advantageous for America to import some goods simply in order to free up our workforce to produce more-valuable goods instead. We, as a nation, have better things to do with our time than produce these less valuable goods. And, just as with the football player and the lawn mower, it does not matter whether we are more efficient at producing them, or the county we import them from is. As a result, it is sometimes advantageous for us to import goods from less efficient nations” (Fletcher, 2011). However, the key to this logic does not consider the opportunity cost forgone if the footballer were to stay home and mow his lawn, as oppose to attending and playing in this week’s game in order to earn a living, which would not be advantageous.
Conclusion
Each of the examples discussed exist in different industries, but as explored above, are still capable of obtaining and maintaining a comparative advantage in their respective markets. In conclusion, there are a variety of reasons why individuals, firms, and countries gain a comparative advantage, and even more so, how it is determined a comparative advantage exists at all. There are challengers of the theory; however, as discussed here, the law of comparative advantage clearly appears to exist.
Multiple Choice Questions
1. The law of says that two will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods.
A. Comparative advantageB. Absolute advantageC. Opportunity costsD. All of the aboveE. None of the above
2. What does it mean if one country is more efficient in the production of all goods?
A. Comparative advantageB. Absolute advantageC. Opportunity costsD. All of the aboveE. None of the above
3. What is the cost of the explicit and implicit resources that are forgone when a decision is made?
A. Comparative advantageB. Absolute advantageC. Opportunity costsD. All of the aboveE. None of the above
4. The law of comparative advantage applies to which party?
A. CountriesB. IndividualsC. FirmsD. All of the aboveE. None of the above
5. Comparative advantages are not limited to legal activities only.
A. TrueB. False
Multiple Choice Answers
1. A – Comparative advantage
2. B – Absolute advantage
3. C – Opportunity costs
4. D – All of the above
5. A - True
References
Alam, Kazim. (2011, October 24). Comparative advantage: American buyers still prefer Pakistani apparel. The Express Tribune with the International Herald Tribune. Available: <http://tribune.com.pk/story/280478/comparative-advantage-american-buyers-still-prefer- pakistani-apparel/> [2011, December 4].
Apple Inc. (2011, October 26). 10-K for Fiscal Year Ended September 24, 2011. Available: <http://files.shareholder.com/downloads/AAPL/1551124296x0x512287/5a5d7b14-9542-4640- 841d-e047ec28bb96/AAPL_10K_FY11_10.26.11.pdf> [2011, December 4].
Economics Interactive. (2011, November). Comparative Advantage and Absolute Advantage. [Online]. Available: <http://www.unc.edu/depts/econ/byrns_web/Economicae/Essays/ABS_Comp_Adv.htm> [2011, November 22].
Fletcher, Ian. The Theory of Comparative Advantage Why it is Wrong. Social Policy, Spring 2011.
TechNewsWorld. (2004, March 8). Tech Buzz. [Online]. Available: <http://www.technewsworld.com/story/33061.html> [2011, December 4].
Thoumi, Francisco E. What Creates Comparative Advantage for Drug Production? Lessons from Colombia. POLICY, Volume 23, Number 1, Autumn 2007.
Wikipedia, The Free Encyclopedia. (2011, November). Comparative Advantage. [Online]. Available: <http://en.wikipedia.org/wiki/Comparative_advantage> [2011, November 22].
Summaries
Summary 1: Supply and Demand (Also, include private goods vs. public goods, marginal analysis, producer and consumer surplus, and how it applies to perfect competition).
The paper begins by defining some very important key terms to the discussion of supply and demand. It proceeds to discuss variables that shift either the demand curve or supply curve. The paper then summarizes four examples of supply and/or demand shifts, including tablet computers, wine, gasoline, and water and energy. This paper was interesting and informative.
Summary 2: Government Policies – Price Ceilings, Price Floors, Excise Taxes, and the Economic Effects of Prohibition (alcohol, drugs, kidneys, etc.)
The paper begins by discussing Prohibition, how it came about and why. It proceeds to discuss the black market that emerged in light of the Prohibition era and then discusses the reasoning why Prohibition ended. The paper goes on to discuss examples of localized prohibition, as well as the highly debated legalization of marijuana. The paper was an interesting point of view and reminded us of a good insight that we can learn a lot from the effects of Prohibition.
Summary 3: Monopoly
The paper starts by clearly defining what constitutes a monopoly, as well as explaining the four sources that create monopoly power. It then proceeds to discuss legislation that was developed to aid in preventing the existence of monopolies. And finally the paper discusses some examples, one of an existing monopolistic situation and one of the potential for a monopoly. This paper was written well and provides useful information.
Summary 4: Risk – Mean, Variance, Standard Deviation, Risk Aversion, Risk Neutral, Risk Lover, Optimal Search
The paper begins by clearly defining some key terms related to risk, including, mean, variance, and standard deviation. It then proceeds to discuss the differences between risk aversion, risk neutral, and risk lover. The paper also includes some examples of these, and wraps up by discussing the optimal search. This paper was informative and provided real-life examples.
Summary 5: Property Rights and Incentives – Include the Tragedy of the Commons
The paper begins by defining property, right, and property rights as an economic idea. It proceeds to discuss government intervention and the necessity of regulations to control the use of common property. The paper goes on to discuss the Tragedy of the Commons, as well as how to avoid it. And the paper concludes with some real world examples. This was a very informative and interesting paper.
December 4, 2011
"A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.
Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?"
http://www.econlib.org/library/Topics/Details/comparativeadvantage.html
November 30, 2011
This article investigates how comparative advantages have changed in the last 30 years. It provides evidence that comparative advantages are not static, but change over time.
On the evolution of institutional comparative advantages.pdf
November 7, 2011
Comparative Advantage
The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law.http://www.unc.edu/depts/econ/byrns_web/Economicae/Essays/ABS_Comp_Adv.htm
November 1, 2011
Examples of Comparative Advantage
"Colombia has become the major centre of production and trafficking of cocaine and a principal supplier of heroin to the United States because it has developed a comparative advantage for producing illegal goods and services. Undoubtedly, if there were no demand, drugs would not be produced. But it is also true that if there were no supply, nobody would consume. These are valid but trivial and incomplete paradigms. Every elementary economics course teaches that demand and supply are the two blades of a pair of scissors, with both necessary to create a market."
"Colombia is today the largest grower of illegal coca and the largest producer of cocaine in the world. It is also a principal supplier of heroin to the US market. It is the first or second largest producer of counterfeit US dollars; has the highest number of kidnappings and assassins for hire; is second in the number of child warriors and displaced people; is the first or second largest Latin American exporter of prostitutes; and has the longest or second longest running Marxist guerrilla insurrection. Colombia is a producer of top quality EU passports and Euros. In mid-2006 the police found a factory producing the very hard to counterfeit Australian dollars. Inevitably, in these circumstances, corruption is widespread."
But "Amphetamine production can take place anywhere yet it is concentrated in a few places, notably where there is social tolerance for such production or for illegality." So how did Colombia gain a comparative advantage in drug production? "To answer this question it is necessary to explain how and why Colombia developed an environment that favoured the growth of an illegal drug industry. Individual human behaviour is limited by explicit social and legal norms and laws and by socially determined personal constraints. To explain why
Colombia is prone to illegal economic activities it is necessary to explain why the state and other institutions such as family, religion, schools and peer groups do not impose limits on individual behaviour but tolerate the breaking of the law and social norms. Colombia has less civil solidarity, reciprocity and trust, and a weaker national identity, than other societies in Latin America."
What Creates Comparative Advantage.pdf
October 31, 2011
I like this article...
The Theory of Comparative Advantage - Why It Is Wrong.pdf
October 23, 2011
To begin, I think it is important to start by defining comparative advantage. The basic definition from Wikipedia states, "In [[/wiki/Economics|economics]], the law of comparative advantage says that two countries (or other kinds of parties, such as individuals or firms thereas) will both gain from trade if, in the absence of trade, they have different relative [[/wiki/Opportunity_cost|costs]] for producing the same goods. Even if one country is more efficient in the production of all goods ([[/wiki/Absolute_advantage|absolute advantage]]) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.[1[[home#cite_note-0|]]][2[[home#cite_note-uslabor-1|]]][3[[home#cite_note-econbook-2|]]]"
http://en.wikipedia.org/wiki/Comparative_advantage