Absolute advantage The ability to produce a good or service, using fewer resources than other producers use.
1 Quart of Berries 1 Fish
1V2 hours 3 hours assigning work, then Maryanne should do both tasks. This, however, would leave Gilligan doing nothing, which is certainly not in the pair's best interests. What can we conclude from this example? That absolute advantage is an unreliable guide for allocating tasks to different workers.
Comparative Advantage. The correct principle to guide the division of labor on the island is comparative advantage:
A person has a comparative advantage in producing some good if he or she can produce it with a smaller opportunity cost than some other person can.
Notice the important difference between absolute advantage and comparative advantage: You have an absolute advantage in producing a good if you can produce it using fewer resources than someone else can. But you have a comparative advantage if you can produce it with a smaller opportunity cost. As you'll see, these are not necessarily the same thing.
Table 2 shows the opportunity cost for each of the two castaways to produce berries and fish. For Maryanne, catching one fish takes an hour, time that could instead be used to pick one quart of berries. Thus, for her, the opportunity cost of one fish is one quart of berries. Similarly, her opportunity cost of one quart of berries is one fish. These opportunity costs are listed in the first row of Table 2. For Gilligan, catching one fish takes three hours, time that he could instead use to pick two quarts of berries. The opportunity cost of one fish for Gilligan, then, is two quarts of berries, and the opportunity cost of one quart of berries is one-half of a fish. (Of course, no one catches half a fish unless they are fishing with a machete, but we can still use this number to represent a rate of opportunity cost.) Comparing the two numbers, we see that Maryanne has the lower opportunity cost for one fish, so she has a comparative advantage in catching fish. But when we turn our attention to berry picking, we see that it is Gilligan who has the lower opportunity cost—half a fish. Therefore, Gilligan—who has an absolute advantage in nothing—has a comparative advantage in berry picking.
Let's see what happens as the two decide to move toward specializing according to comparative advantage. What happens each time Gilligan decides to catch one fewer fish? Table 2 tells us that he frees up enough time to pick 2 quarts of berries. We can write the results for Gilligan's production this way:
Table 2 also tells us that each time Maryanne decides to catch one additional fish, she must sacrifice shift time away from berry picking, sacrificing 1 quart of berries:
Comparative advantage The ability to produce a good or service at a lower opportunity cost than other producers.
Opportunity Cost of: 1 Quart of Berries 1 Fish
1 fish 1 quart of berries
For Gilligan fish 2 quarts of berries
Now, what happens to total production on the island each time the pair moves toward producing according to comparative advantage? As you can see, Maryanne makes up for the fish that Gilligan is no longer catching. But Gilligan more than makes up for the quart of berries that Maryanne isn't picking. In fact, each time the two move toward specialization, fish production remains unchanged, whereas berry production increases. The gains continue until Maryanne is spending all of her work time fishing, and Gilligan is spending all of his work time picking berries.
Since—by producing according to comparative advantage—total production on the island increases, total consumption can increase, too. Gilligan and Maryanne can figure out some way of trading fish for berries that makes each of them come out ahead. In the end, each of the castaways will enjoy a higher standard of living when they specialize and exchange with each other, compared to the level they'd enjoy under self-sufficiency.
What is true for our shipwrecked island dwellers is also true for the entire economy:
Total production of every good or service will be greatest when individuals specialize according to their comparative advantage. This is another reason why specialization and exchange lead to higher living standards than does self-sufficiency.
When we turn from our fictional island to the real world, is production, in fact, consistent with the principle of comparative advantage? Indeed, it is. A journalist may be able to paint her house more quickly than a housepainter, giving her an absolute advantage in painting her home. Will she paint her own home? Except in unusual circumstances, no, because the journalist has a comparative advantage in writing news articles. Indeed, most journalists—like most college professors, attorneys, architects, and other professionals—hire house painters, leaving themselves more time to practice the professions in which they enjoy a comparative advantage.
Even comic book superheroes seem to behave consistently with comparative advantage. Superman can no doubt cook a meal, fix a car, chop wood, and do virtually anything faster than anyone else on the earth. Using our new vocabulary, we'd say that Superman has an absolute advantage in everything. But he has a clear comparative advantage in catching criminals and saving the known universe from destruction, which is exactly what he spends his time doing.
Specialization in Perspective. The gains from specialization, whether they arise from developing expertise, minimizing downtime, or exploiting comparative advantage, can explain many features of our economy. For example, college students need to select a major and then, upon graduating, to decide on a specific career. Those who follow this path are rewarded with higher incomes than those who dally. This is an encouragement to specialize. Society is better off if you specialize, since you will help the economy produce more, and society rewards you for this contribution with a higher income.
The gains from specialization can also explain why most of us end up working for business firms that employ dozens, or even hundreds or thousands, of other employees. Why do these business firms exist? Why isn't each of us a self-employed expert, exchanging our production with other self-employed experts? Part of the answer is that organizing production into business firms pushes the gains from specialization still further. Within a firm, some people can specialize in working with their hands, others in managing people, others in marketing, and still others in keeping the books. Each firm is a kind of minisociety within which specialization occurs. The result is greater production and a higher standard of living than we would achieve if we were all self-employed.
Specialization has enabled societies everywhere to achieve standards of living unimaginable to our ancestors. But, if it goes too far, it can have a downside as well. In the old film Modern Times, Charlie Chaplin plays a poor soul standing at an assembly line, attaching part number 27 to part number 28 thousands of times a day. In the real world, specialization is rarely this extreme. Still, it has caused some jobs to be repetitive and boring. In some plants, workers are deliberately moved from one specialty to another to relieve boredom.
Of course, maximizing our material standard of living is not our only goal. In some instances, we might be better off increasing the variety of tasks we do each day, even if this means some sacrifice in production and income. For example, in many societies, one sex specializes in work outside the home and the other specializes in running the home and taking care of the children. Might families be better off if children had more access to both parents, even if this meant a somewhat lower family income? This is an important question. While specialization gives us material gains, there may be opportunity costs to be paid in the loss of other things we care about. The right amount of specialization can be found only by balancing the gains against these costs.
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