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Baseball example: Jeter and Giambi
|Player||Errors at 1b||Errors at ss|
Total errors if Jeter plays ss and Giambi plays 1b: 35
Total errors if Jeter plays 1b and Giambi plays ss: 122
Household example: time required to fold ten shirts and time required to roll ten pairs of socks
|John||10 minutes||5 minutes|
|Fred||4 minutes||4 minutes|
Absolute advantage vs. comparative advantage
Who should fold shirts, and who should fold socks?
If John folds 40 pairs of socks, what is the opportunity cost in terms of shirts? How abour for Fred?
Ricardo's classic example: labor required to produce one unit of cloth or one unit of wine
England requires relatively less labor to produce cloth, so has comparative advantage in producing cloth
Suppose that on the world market, one shirt can be exchanged for one bottle of wine
Suppose that in England, it takes 100 workers an hour to produce a shirt and 120 workers an hour to produce a bottle of wine.
England wants to spend half its income on shirts, and half its income on wine.
England has 12,000 workers.
Without trade, England might put 6000 workers in shirts and 6000 in wine. Shirt production = 6000/100 = 60 and wine production = 6000/120 = 50
With trade, England would put all 12,000 workers in shirts and produce 12,000/100 = 120 shirts. It can trade half the shirts for wine on the world market, thereby consuming 60 shirts and 60 bottles of wine. It has gained 10 bottles of wine from being able to trade and specialize.
Always can consume more with trade than without trade
Opportunity cost is higher in pre-trade domestic market than in pre-trade world market: before trade, to get 50 bottles of wine, England had to give up 60 shirts. With the world market, England could get 60 bottles of wine for 60 shirts.
People in the wine industry in England probably would rather not have free trade. They would complain about "unfair trade," "dumping," etc.