Trade or Comparative Advantage

Trade, voluntary exchange, is now controversial, particularly international trade. Are we being taken advantage of by the Peoples Republic of China?  After all they have lower labor costs and fewer expensive pollution controls. Or, as in most areas of life, is it a trade off between benefits and detriments? Free trade with the PRC gets American consumers cheaper Iphones but causes other Americans to experience a loss of high paying manufacturing jobs.

I contend that trade creates a free benefit for all parties involved, be they more or less productive, higher or lower cost producers, developed or underdeveloped economies. Interestingly when trade occurs, the stronger benefits the weaker, as well as itself.

Imagine two castaways on an island.  In abstract, an economy

I will postulate some reality constraints on them.  Each has to eat to survive.  There are two categories of food available to them: fish and fruit.  If one ate only fish he would die of scurvy, if one ate only fruit he would lack protein and starve,

Our castaways, Mr A and Mr B, each need 4 small fish per day and 4 fine fruit to meet their caloric requirements. Mr A and Mr B can meet their requirements by each fishing 4 hours per day and each gathering fruit 4 hours per day. Under these conditions there would be no trade between them.

In the real world, some people are better than others at tasks.  Anyone who ever played a pick up game of sports knows some people are better than others at any given task. Suppose Mr A is a better fisherman and can catch his 4 small fish in three hours.  Suppose Mr B is a better gatherer and can gather his 4 fruit in three hours.

Without trade

Mr A      3 hours fishing (4 fish)      4 hours gathering (4 fruit)     7 hours work to survive

Mr B      4 hours fishing (4 fish)       3 hours gathering (4 fruit)      7 hours work to survive

Now suppose it occurs to Mr A and Mr B to make a trade.  Mr A could trade 4 fish to Mr B for 4 fruit.  Now the situation is:

Mr A     6 hours fishing (8 fish)   0 hours gathering fruit  (no fruit)      6 hours to survive

Mr B     0 hours fishing (no fish)   6 hours gathering fruit (8 fruit)     6 hours to survive

Our little economy just achieved the same output with two fewer hours of work per day, for free.

Next entry: what if Mr A is better at both fishing and fruit gathering than Mr B?