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#1 Jul 19, 2020 9:11 pm

Real Distwalker
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Comparative Advantage

Suppose you are a high end lawyer who can bill $500 per hour all day.  Let's also say that you type 100 words a minute.

Now let's say you have an assistant you pay $10 per hour.  He types 30 words a minute.

You are a much, much better typist than your assistant.  Should you fire your assistant and do all your own typing?

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#2 Jul 20, 2020 10:02 am

New Historian
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Re: Comparative Advantage

No, you should pay your typist more so s/he can pay for classes and learn to type at 100wpm, ya cheap basstid!

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#3 Jul 20, 2020 11:00 am

Real Distwalker
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Re: Comparative Advantage

LOL!  Yeah, these scenarios have lots of potential options.

The lesson I was trying to present, however, was that the assistant does not have an absolute advantage in typing.  He can type less than a third as fast as his boss.  He does have a comparative advantage, however.  His words per minute cost a hell of a lot less than the cost per word of his boss.

When the boss types, the opportunity cost is 8.3 cents per word.  The cost of the assistant is about half a cent a word.  The boss would be a fool to do his own typing. 

So it is with international trade.  Grenada has an absolute advantage over Canada in producing nutmeg.  But even in areas where Canada is more productive than another country it often makes sense to send production to that country to free up resources that are more lucrative.  This is called comparative advantage.

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#4 Jul 20, 2020 11:08 am

New Historian
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Re: Comparative Advantage

Comparative advantage also conveniently keeps poor nations in their place. "You don't have a comparative advantage in producing high-tech stuff (that you pay a fortune for), leave that to us, you just keep on producing those nutmegs (that we pay a pittance for), you're good at that!"

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#5 Jul 20, 2020 11:17 am

Real Distwalker
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Re: Comparative Advantage

Well, it is amazing because people like Expat cry fat tears than any developing nation has any comparative advantage.  "God forbid that T-shirts and flip-flops be made in Bangladesh when they could be being made in Britain!"  Bah!

'In any case, 'Made in Japan; meant cheap-ass trinkets in the 1950s.  Now it means super-high end products.

In the 1970s, 'Made in Korea" meant cheap crap.  Now it means Samsung and LG.

Nations that take advantage of the comparative advantage in trade start improving their lot... if they want to.

What choice does Grenada have anyway?  Attempt autarchy?  That would be a disaster.

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#6 Jul 20, 2020 11:20 am

Real Distwalker
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Re: Comparative Advantage

By the way, Grenada has an absolute advantage in producing nutmeg compared to most nations.

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#7 Jul 20, 2020 11:58 am

WH Man
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Re: Comparative Advantage

Real Distwalker wrote:

By the way, Grenada has an absolute advantage in producing nutmeg compared to most nations.


That's why countries would buy nutmegs from Grenada than trying to produce their own.

Comparative advantage is an established economic principle. Can you imagine what Alaskans would have to pay for an orange if they decided to grow their own oranges (indoors)? Or what Floridians would have to pay for a pound of Alaskan king crabs if they decided to farm their own crabs?  Free trade between those two states confer equal benefits.

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#8 Jul 20, 2020 12:05 pm

New Historian
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Re: Comparative Advantage

"Attempt autarchy?  That would be a disaster."

Huh?

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#9 Jul 20, 2020 12:22 pm

Real Distwalker
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Re: Comparative Advantage

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#10 Jul 20, 2020 3:20 pm

houston
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Re: Comparative Advantage

Real Distwalker wrote:

Suppose you are a high end lawyer who can bill $500 per hour all day.  Let's also say that you type 100 words a minute.

Now let's say you have an assistant you pay $10 per hour.  He types 30 words a minute.

You are a much, much better typist than your assistant.  Should you fire your assistant and do all your own typing?

No, you should continue to charge the client by the minute at $500/hr. for every letter typed and every consultation call. Any slick lawyer knows how to get full days pay for a few hours of their actual billable time.
He does 2 hours in court, then has the assistant do 6 hours of typing for $10/hr.
Client gets billed for 8 hours @ $500.

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