Comparative Advantage
Written by Studio AM.
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Being faster at two tasks does not necessarily mean it is best to do both yourself. Comparative advantage concerns opportunity cost: what one person gives up to perform a task compared with what another gives up.
Suppose a lawyer can type a document in half an hour. In that time she could earn one hundred dollars from available legal work. A typist needs an hour for the document, but would otherwise earn twenty dollars on another job. If the lawyer pays forty dollars for accurate typing, she can take the legal work and come out sixty dollars ahead compared with typing it herself. The typist also earns more than the available alternative. In this example, both benefit even though the lawyer types faster.
The comparison depends on the alternatives. If no legal work is available, or the typing needs costly corrections, the result can change. It is not enough to say that one task pays more in general. The question is what each person actually gives up for this particular exchange.
The counterintuitive lesson extends to trade between countries. A producer that needs more resources for every good can still have a lower opportunity cost for one good relative to another producer. Differences in those costs can create gains from specialization and exchange, although transport costs, trading terms and the distribution of gains also matter. Being less efficient at every task does not by itself rule out a useful trade.
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Questions
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Question 1 of 4
What is the central idea of the passage?
The answer is A: Comparative advantage depends on relative opportunity costs, not speed alone.
The typist gives up less valuable alternative work to type the document. The exchange can benefit both despite the lawyer's greater speed.
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Question 2 of 4
Why might the skilled lawyer hire a slower typist?
The answer is C: Typing would replace more valuable legal work
Typing would replace one hundred dollars of available legal work. Paying forty dollars leaves the lawyer sixty dollars ahead in the example.
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Question 3 of 4
What can be inferred about someone who uses more resources for every task?
The answer is A: They may still offer a trade based on a lower relative opportunity cost.
The last paragraph says lower efficiency in every task does not rule out a lower relative opportunity cost for one of them.
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Question 4 of 4
What does 'counterintuitive' mean in this passage?
The answer is A: against what common sense expects
The faster typist can benefit from hiring a slower one. That result runs against the first impression that speed alone should decide the work.
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