INTERNATIONAL TRADE - Part 6

That is because each country now produces where it has a comparative advantage, whether or not it has an absolute advantage. Economists would say that the United States has an “absolute advantage” in producing both products but that Canada has a “comparative advantage” in producing chairs. That is, Canada loses fewer television sets by shifting resources to the production of chairs than the United States would lose by such a shift. Under these conditions, Americans can get more chairs by producing television sets and trading them with Canadians for chairs, instead of by producing their own chairs directly, using labor and other resources that could have gone into producing something where their advantage was greater. Conversely, Canadians can get more television sets by producing chairs and trading them for American-made television sets, rather than producing television sets themselves.

Only if the United States produced everything more efficiently than Canada by the same percentage for each product would there be no gain from trade because there would then be no comparative advantage. Such a situation is virtually impossible to find in the real world. Similar principles apply on a personal level in everyday life. Imagine, for example, that you are an eye surgeon and that you paid your way through college by washing cars. Now that you have a car of your own, should you wash it yourself or should you hire someone else to wash it — even if your previous experience allows you to do the job in less time than the person you hire? Obviously, it makes no sense to you financially, or to society in terms of over-all well-being, for you to be spending your time sudsing down an automobile instead of being in an operating room saving someone's eyesight. In other words, even though you have an “absolute advantage” in both activities, your comparative advantage in treating eye diseases is far greater.

The key to understanding both individual examples and examples from international trade is the basic economic reality of scarcity. The surgeon has only 24 hours in the day, like everyone else. Time that he is spending doing one thing is time taken away from doing something else. The same is true of countries, which do not have an unlimited amount of labor, time, or other resources, and so must do one thing at the cost of not doing something else. That is the very meaning of economic costs — foregone alternatives, which apply whether the particular economy is capitalist, socialist, feudal, or whatever — and whether the transactions are domestic or international.

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