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Gains from trade

Gains From Trade

How does trade make people better off?


  • Imagine that you are the manager of a fast-food restaurant. You are outgoing, interact well with customers, and work the cash register proficiently. You are also efficient in the kitchen and can manage several tasks at once, such as making pizzas, preparing salads, and filling drinks.


  • You have one employee who is slow in the kitchen and often struggles to cook while filling drink orders. Your employee works the cash register well but interacts little with the customers.


  • What is your opportunity cost if you work the cash register?

  • What is your opportunity cost if you work in the kitchen?


  • Based on your opportunity costs, describe where you will work and where you will place your employee. Explain your rationale.

Absolute advantage1
Absolute Advantage

Why would He-Man bother trading with Skeletor?

Comparative advantage
Comparative Advantage

  • absolute advantage: the time and labor required for you to produce something is less than it is for another producer (you are more productive, overall)

  • comparative advantage: the ability to perform a task at a lower opportunity cost than someone else is able to perform that same task

Comparative advantage1
Comparative Advantage

  • He-Man and Skeletor would still benefit from trading, even though He-Man has an absolute advantage, because each has a different comparative advantage.

  • Let’s explore this concept…

Bill gates
Bill Gates

Founder of Microsoft.

Made his fortune writing software, including Microsoft Windows and other widely-used programs.

So wealthy, it would cost him more money to stop and pick up a $50 bill than to simply keep going about his regular job.

Justin bieber
Justin Bieber

Retired singer.

Made his fortune crooning pre-adolescent girls out of their iTunes money.

Now spends his time getting into trouble with the law, collecting royalties from his songs.

The scenario
The Scenario

  • Bill Gates has a strong work ethic and holds an absolute advantage in productivity.

  • Should this mean, then, that Bill Gates should mow his own lawn?

  • What would Bill Gates be giving up to take the time to mow his own lawn? (What would be his opportunity cost? )

The scenario1
The Scenario

Bill Gates would be better off hiring Justin Bieber to mow his lawn and going to work instead. He would make much more money.

Justin would be better off mowing Bill’s lawn, since his opportunity cost – getting arrested for driving under the influence of weed (or just plain wasting time) – is smaller. Plus, he’d earn like $10, and get some sunshine and exercise.

Gains with trade
Gains With Trade!

Comparative advantage2
Comparative Advantage

  • Comparative advantage applies to nations as well as individuals. When nations specialize in producing what they have a comparative advantage for, and then trade, society usually benefits.

  • Some factors are fairly obvious, i.e. climate and natural resources.

    • Florida excels at orange production because of the warm, humid weather.

    • Saudi Arabia excels in oil production because it has vast oil reserves.

Comparative advantage3
Comparative Advantage

  • Other factors, like education, wage levels, and technology, also play a role.

    • The United States has a highly educated and highly skilled workforce, giving it a comparative advantage in developing advanced technologies like computer systems.

    • Less developed nations have a comparative advantage in the production of simpler goods like clothing that do not require skilled labor.

Trade makes us wealthier
Trade Makes Us Wealthier!

  • Trade moves goods to people who value them. Doing so increases their value.

    • You have a new ball cap that does not fit you.

    • Your friend has a soccer ball they don’t use.

    • You want the ball, she wants the hat.

    • You trade and both end up with something you want. In essence, you are both wealthier.

  • Remember – wealth is more than just money. It is whatever people value!

Trade makes us wealthier1
Trade Makes Us Wealthier!

  • Trade increases the quantity and variety of goods available.

Trade makes us wealthier2
Trade Makes Us Wealthier!

  • Trade lowers the cost of goods.

    • First, by opening up markets to less costly goods from other places.

    • Second, by expanding markets for products. This allows producers to take greater advantage of mass production – buying supplies and producing things on a large scale can often be done more cheaply than on a small scale.

More winners than losers
More Winners Than Losers

  • Not everyone gains from expanding global trade.

    • Cheap imports can take business away from American producers and even force some out of business.

    • This can lead to American workers losing their jobs.

    • This especially impacts places that depend more heavily on manufacturing (historically, Mansfield!)

More winners than losers1
More Winners Than Losers

  • Economists point out that as the economy changes, old jobs may be lost, but new ones are created.

Free trade
“Free Trade”

  • In theory, completely free trade (in which national governments do not interfere whatsoever with trade between nations), should make people better off.

  • We have already seen, though, how free trade can hurt the economies of certain parts of the country - at least in the short run.

  • Are there any other drawbacks?

Free trade1
“Free Trade”

  • In theory, the United States should go all-in on industries they have a comparative advantage for (high-tech, high-skill production and service jobs) and leave simpler tasks to less-developed countries who hold a comparative advantage in those.

  • What exceptions might there be?

Strategic industries
Strategic Industries

  • A strategic industry is an industry that a government considers to be very important for the country’s economy or safety.

Strategic industries2
Strategic Industries

  • Why might it not be in the best interest of our national security to completely turn over things like food production to less developed countries, even though they might hold a comparative advantage in it?

The roman example
The Roman Example

  • “By the time of Augustus, North Africa and Egypt were supplying most of the grain that the empire consumed, with farms in Italy selling only a marginal amount. In other words, instead of a fertile citizen population tilling the fields and sustaining the state locally, the Romans outsourced their agricultural production to feed their cities across the Mediterranean.”

The roman example1
The Roman Example

  • “The consequences for the later empire could not be any more grave…[T]he Vandals would continue moving to North Africa, and eventually took over Carthage, ending the supply of grain being shipped to Rome. This meant functionally that the city could scarcely feed itself…”

    - Ryan Grant, The Distributist Review