So after talking to a couple of students I realize that before I start going through the pros and cons of international trade we should also consider the theoretical basis of international trade. I will put up some detailed comments on Absolute and Comparative Advantage later, but, for now, I hope the following analogy will help you gain a basic understand of the two theories.
When I was little and my Dad was working in the garden I would always want to go and help – that’s the kind of guy I am. I like to think that my Dad welcomed this help but looking back I’m not so sure.
After all my dad was better at everything he was doing. He was bigger, more experienced and far less likely to chop off his own foot with a chainsaw. In other words he had the skills and resources that gave him an Absolute Advantage in all aspects of producing a neat and tidy garden. He could do everything more efficiently than I could.
Now my Dad didn’t want to hurt my feelings so he would always give me a job to do, and, invariably, that job was raking up leaves. Why did he always give me this job? Well, he was basically applying the law of comparative advantage.
He was better at all the tasks and was worse at all of them. But I was not equally worse; I was least bad at raking leaves.
(My six year old self would have been really bad at using the chainsaw to cut down the tree! But I was not quite so bad at using the rake to collect up the leaves. I had a Comparative Advantage in raking leaves!)
So, my Dad hands me the rake and I start raking. It takes me 2 hours when it would have taken him 20 min but that means he has saved 20 mins. He now has 20 min longer to work on cutting down that tree or 20 min longer to enjoy a beer.
So we both win as a result of the trade. He has more leisure time and or more output. And I gained employment.
That is basically the basis of Comparative Advantage and therefore the basis for international trade.
Now we just need to apply it to countries:
You could say my Dad represents America in the 1960s and my younger-self represents Japan in the 1960s.
America can produce everything more efficiently than Japan. But, Japan is relatively good at electronics. So America shifts some electronic production to Japan and more of America’s labor shifts to the service industries which it is far more efficient at than Japan.
Japans gains employment and foreign income and starts to develop. American consumers can now enjoy more leisure time, greater employment in service industries and cheaper electronics. They all win.
I hope that has helped. Like I said I will come back to it in greater detail later.