Confused about comparative advantage, specialisation and trade.
November 3, 2008 9:22 PM Subscribe
EconomicsNewbieFilter: I'm confused about absolute advantage, comparative advantage and specialisation. Particular example inside.
posted by obiwanwasabi to Education (5 answers total) 2 users marked this as a favorite
I'm doing a Master of Management, which means I have to cram for microeconomics. Hah, I thought - I remember all of this from high school - scarcity, supply, demand, elasticity, PPCs. Then I hit Chapter 2 of Frank and Bernanke's Principles of Microeconomics and groan - frickin' advantage and specialisation.
So I learn about the difference between absolute and comparative advantage. I see that just because somebody has an absolute advantage for producing two goods doesn't mean they can't benefit from specialisation and trade. Specialisation good. Trade good. Everybody wins. So far, all OK.
At the end of the chapter there's an exercise:
Ted can wax a car in 20 minutes or wash a car in 60 minutes. Dan can wax a car in 15 minutes or wash a car in 45 minutes. Who has an absolute advantage in washing cars? What is each man's opportunity cost of washing a car? Who has a comparative advantage in washing cars? Can Ted and Dan benefit from specialisation and trade? Explain.
I figure that Dan has an absolute advantage in washing cars (and waxing, too). Each man has the same opportunity cost for washing a car - three wax jobs. This would seem to mean that neither has a comparative advantage in washing cars, and this in turn would seem to imply that there's no benefit for Ted and Dan to specialise and trade.
Up until now, though, the text has given a pretty consistent message that specialisation and trade are always a good thing, so I think I've missed something. I've compared their PPCs (Ted's lies entirely within the 'inefficient' zone of Dan's - but doesn't this just mean Dan has an absolute advantage for waxing and washing?) and checked what would happen if each specialised in waxing or washing over a 6-hour day then traded (they get more washes but less waxes, or vice versa).
Where have I gone wrong?