If there are 2 goods in the world, and 2 persons...
Alex can make Yoyos for $1 each and Zithers for $2 each, while
Bob makes Yoyos for $5 apiece and Zithers for $20 each,
how should Alex and Bob trade?
Alex should make Zithers, Bob should make Yoyos, and Bob and Alex should trade Zithers for for Yoyos at a 2-4:1 ratio. Any ration better than 2:1 makes Alex richer, and any ratio less than 4:1 makes Bob richer.
What if two nations, Albania and Bulgaria, each make goods... Chocolate and Dumplings.
If Albania is worse at making EVERYTHING than Bulgaria...the same logic applies. Even if It's Albania's stupid government that all the crap happen.
Albania can make a lump of chocolate or a dumpling for 1 hour of work.
Bulgaria can make 2 lumps of chocolate or 4 dumplings for 1 hour of work.
What happens? Albanians and Bulgarians trade 2 lump of chocolate for 3 dumplings, more or less.
Albanians are richer than they were before. Bulgarians are richer than they were before.
Perhaps some Albanian dumpling-makers and Bulgarian chocolatiers are unhappy with the arrangement...but the result is as if there were a machine that turned 2 chocolates into 3 dumplings or vice versa.
It is IMPOSSIBLE, given very very basic trade theory, for a person or nation not to have a comparative advantage with another nation. It misunderstands how international trade works.
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1 comment:
Nice clean explanation of comparative advantage.
Let me play the other side:
Albania makes a lump of chocolate or a dumpling in 1 hour.
Italy makes 100 lumps of chocolate or 100 dumplings in an hour.
There is no need or advantage for either country to trade. Over time Albania might increase productivity to an Italian level, and then consider trade if the numbers work.
An enterprising Italian off shores to Albania with Italian production methods. He pays Albania 2 dumplings an hour and he exports 98 dumplings an hour back to Italy. Albanian dumplingers have doubled their wages, and Italy has seemingly free dumplings, but Italian dumpling makers and the associated infrastructure are in shambles with former workers living out of dumpsters.
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